UK: Chancellor announces reforms to local government pension fund asset pooling in Mansion House speech

Why should I read this?

The Chancellor has used her annual Mansion House speech to announce further detail of the UK Government’s plans for reform of the Local Government Pension Schemes (“LGPS”).  The speech itself was relatively light on the detail, but pointed towards the creation of Canadian and Australian style “megafunds” to power growth in the economy, in particular in private equity and infrastructure in the UK.  However, it quickly became clear that this would be through maintaining the existing LGPS structure and accelerating investment into the eight existing LGPS pools rather than wholesale restructuring of the LGPS.

However, the real detail came through the release of the Interim Report of the Pensions Investment Review and two new consultations:

1. Unlocking the UK pensions market for growth – This consultation focuses entirely on achieving scale in workplace defined contribution (“DC”) pension schemes by creating larger, more consolidated DC pension funds. It does not address the LGPS
2. Local Government Pension Scheme (England and Wales): Fit for the future

Both consultations run for nine weeks, closing on 16 January 2025.

The documents were accompanied by an analytical publication ‘Pension fund investment and the UK economy’, looking at the historic investment trends of pension funds and international examples and the role of pension funds in economic growth.

What is in the Interim Report?

The Pensions Investment Review Interim Report sets out the initial findings of phase one of the Pensions Investment Review.  The final report is expected in Spring 2025.  The Interim Report and consultations have been produced to allow a full consultation process ahead of the Pension Schemes Bill which will be introduced next year and will include any necessary primary legislation needed to deliver the policy.

The focus of the Review for the LGPS is to look at how tackling fragmentation and inefficiency can unlock the investment potential of the LGPS, including through further consolidation.

The Interim Report highlights that the approaches and outcomes of asset poling in the LGPS vary and concludes that not all LGPS pools are equal in their ability to continue to develop to meet future challenges.

The consultations focus on a series of measures which will require all LGPS funds to delegate the management of all their assets to their asset pool, alongside requiring that pools conform to a rigorous and universal set of standards.  This model is informed by international best practice.

The proposals will require administering authorities to work with local, mayoral and strategic authorities to identify local investment opportunities, and to have regard for local growth plans and priorities when setting their investment strategies.  This would be a significant development for LGPS funds.  The LGPS pools would be required to carry out due diligence on local investment proposals, to make the decision to invest in these opportunities where they deem it to be in the interest of the fund and its members, and to manage such local investments.

The proposals aim to ensure consistently high standards of governance across the LGPS and deliver the robust and resilient governance and administration which members and employers expect at both the pool and fund level. This builds on the LGPS Scheme Advisory Board’s 2021 Good Governance recommendations.

Gary Delderfield, Partner and Head of our Public Sector Pensions Group, comments:

“The chancellor’s inaugural Mansion House speech and the Interim Report point more towards the evolution of the LGPS rather than a wholescale revolution of the scheme.  Many people were expecting the creation of new ‘mega-fund’ structures which have not materialised.  It seems clear that government is focused on making LGPS funds invest at greater speed and in greater amounts into their existing pools and focus more on local investment.  That said, within the detail there are many significant challenges ahead for both the LGPS and its pools if they are to meet the government’s expectations and timescales.  It appears that some pools may be forced into restructuring their current operating models.”

Richard Batchelor, Partner in our Financial Services team, comments:

“The Government's proposed plans for LGPS pooling have been long awaited, with the review having been initiated under the previous Government.  It is no surprise to see an accelerated and ambitious timetable for the pooling of assets with a focus on scale.  Having advised the majority of the pools on their original establishment, governance and subsequent journey through asset pooling, we appreciate the size of the task ahead, particularly for those who may decide to establish an FCA regulated manager.  Our team remains ideally placed to support the pools to navigate the complex intersection of pensions law, public law, procurement and financial services regulation.”

What do I need to know about the LGPS Fit for the Future consultation?

The Local Government Pension Scheme (England and Wales): Fit for the future consultation focuses on three main areas:

1. Reforming the LGPS asset pools

The proposal is for this to be achieved by mandating minimum standards deemed necessary for an optimal and consistent model, in line with international best practice:

• LGPS administering authorities to be required to fully delegate the implementation of investment strategy to their pool, and to take their principal advice on their investment strategy from the pool (rather than independent investment consultants). It may take some time for some of the pools to be able to offer this advisory capability and funds may be uncomfortable relying solely on their pools for the advice. 
• Pools to be required to be investment management companies authorised and regulated by the Financial Conduct Authority (FCA), with the expertise and capacity to implement investment strategies. This is likely to have a significant impact for at least three of the current pool structures.  The consultation recognises that this could involve establishing a new pool company, merging with another pool or becoming a client of another pool company for some or all services required.
• Administering authorities to be required to transfer legacy assets to the management of the pool with listed assets accorded first priority.

Will this lead to the merger and consolidation of pools?

The consultation refers to pool mergers and sharing of services if this provides a more efficient route to reaching the required standard.  Each pool is expected to demonstrate why a merger with another pool, or use of existing capability in an established pool company, would not be a more cost effective or otherwise preferable approach to achieving compliance with the reform proposals.  However, Government points out that it is not seeking to use this as an opportunity to move to a single pool for the whole of the LGPS.  Neither is it seeking to redraw pooling arrangements along geographic lines if this does not already exist.

The consultation refers to pool collaboration, encouraging pools to consider how this could be done in areas where they have specialisms, citing examples such as the London Fund and GLIL.  This is an idea that government expects pools to consider further, but recognises there may be procurement challenges and seeks views on this.

The consultation raises the possibility of pools playing a role in the administration of the LGPS, something only LPP currently does.  It also considers the possibility for further collaboration between LGPS funds in relation to their administration, for example by sharing services.

In addition to responding to the consultation, LGPS pools, working with their partner funds, are being asked to submit a separate proposal by 1 March 2025 setting out how they will deliver the proposed pooling model and complete the transfer of all assets including legacy assets.  Proposals will need to include their view of the costs, a timeline, potential barriers and solutions.

The proposed deadline to move to the new model of pooling is March 2026.  This is to align with reviews of investment strategy following the 2025 actuarial valuations, and takes account of the timescale to complete the necessary FCA applications.   This deadline is very tight.

2. Boosting LGPS investment in their localities and regions in the UK

LGPS administering authorities will be required to:

• set out their approach to local investment in their Investment Strategy Statements, including a target range for the allocation. LGPS must have regard to local growth plans and priorities
• work with local authorities, Combined Authorities, Mayoral Combined Authorities, Combined County Authorities and the Greater London Authority to identify local investment opportunities. In Wales, this will involve working with relevant Corporate Joint Committees on their proposed economic development priorities and plans, and with local authorities more broadly to identify investment opportunities
• set out their local investment plan and its impact in their annual reports. Government intends to work with the LGPS Scheme Advisory Board (“SAB”) to produce new statutory guidance on pooling, and updated guidance on investment strategy statements and annual reports.

It will be for administering authorities to identify the local investment opportunities and provide these to their pool to carry out the due diligence.  The pool would then be required to make the final decision on whether to invest.  It is unclear how this will fit with the fiduciary duties of administering authorities, although we assume the ultimate decision to allocate assets to local investment will remain with the administering authority.

Government is clearly expecting to see greater collaboration between funds, pools and combined authorities of all types on local investment,  including investments local to any of a pool’s partner administering authorities, or investments in their region.  This will clearly be a significant development for some pools who do not currently have this expertise.

New statutory guidance on this proposal is promised.

3. Strengthening the governance of LGPS administering authorities and LGPS pools

This proposal builds on the recommendations of the SAB in their 2021 Good Governance Review including:

• The appointment of a senior LGPS officer who has overall delegated responsibility for the management and administration of the fund
• Participation in a biennial independent governance review and, if applicable, producing an improvement plan to address any issues identified. The review should be carried out by independent experts in the field with good understanding of the LGPS. The Secretary of State will reserve the right to commission reviews of specific funds if there is reason to believe the fund may not be appropriately equipped or resourced to fulfil its responsibilities;
• Preparing and publishing a governance and training strategy (replacing the governance compliance statement), including a conflicts of interest policy
• Preparing and publishing an administration strategy
• Improving the readability of annual reports, in particular by reducing the various strategy statements that currently must be included

There will be new requirements on knowledge and training for committee members, to ensure that the senior officer and other officers have the appropriate level of knowledge and understanding for their roles, aligning the requirements for pension committee members with the existing requirements for Local Pension Board members.

The government is considering a new requirement for administering authorities to appoint a new independent adviser. The role would encompass supporting the committee on investment strategy, governance and administration.

New statutory guidance is promised to support these requirements.

The consultation focuses quite heavily on conflicts of interest for members serving on pension committees as well as conflicts between the administering authority and scheme employers.  This is something that could have greater significance with the push for more local investment.

Will this lead to fund mergers?

While the proposals do not include any fundamental changes to the LGPS fund structure (as some were expecting), they will impose many new requirements on administering authorities, in many cases including the appointment of new senior pension officers. Government encourages administering authorities to consider whether there would be benefit in fund mergers, especially in light of the proposed reforms and increased responsibilities on funds. 

The Government makes a veiled reference its powers to wind up funds if new independent governance reviews do not deliver the required levels of change.

Proposals relating to pool governance

It is proposed that, pool boards should include one or two representatives from the group of shareholder administering authorities as well as meeting the FCA’s usual requirements for board composition and independent directors. These representatives would require the appropriate skills and training.

The government proposes further requirements for pools to improve transparency and reporting, including publication of performance and transaction costs.

Next steps

The consultations will run for nine weeks, closing on 16 January 2025.  Eversheds Sutherland will be responding to the consultation.  If you would like to feed in to our response, on an attributed or anonymous basis, please get in touch your usual Eversheds Sutherland contact or one of the contacts at the end of this briefing.

Further reading

Please see our previous client briefings:

• Facilitating long-term investment: The UK Long Term Asset Fund (LTAF)
• UK: The incoming Labour Government’s plans for asset management

How Eversheds Sutherland can help

Eversheds Sutherland was heavily involved in the LTAF during its development. We worked on one of the first LTAFs to be approved and launched. We have since been instructed in relation to a number of other projects across a wide spectrum of structures, asset classes (including venture capital) and target investor types, both institutional and retail. We have acted for managers, depositaries and investors (including for pension scheme investors).

Our team have been advising on regulatory interpretation and product development for the fund management industry since the 1980s and we have been at the forefront of new products under European and UK regulation in the period since then. Our in-depth understanding of the sector and experience with the practical implementation of new product categories mean that we are very well placed to guide you in complying with the changing product and regulatory environment.