How LGPS pools are implementing Fit for the Future reforms

First, the disbanding of Access and the Brunel Pensions Partnership mean the remaining pools are adding large numbers of additional funds. The Local Pensions Partnership is expanding from three to nine, Border to Coast Pensions Partnership is adding seven to take to it to 18 partner funds and LGPS Central is gaining seven to take it to 15 funds. London CIV is adding one extra fund.

Pools also need to become the principal providers of investment advice – in other words, replacing their partner funds' existing investment consultants.

Both of these changes have a tight deadline.

Local Pensions Partnership Investments (LPPI) chief investment officer Richard Tomlinson says: "Each pool faces different challenges as each of us come from a different place."

LGPS Central chief client and advisory officer Trevor Castledine adds: "It is not realistic to expect every pool to deliver every service in its entirety to every partner fund by 1 April."

This will have to be a process where there is a clear plan with the correct resources in place but the delivery will take time. "Saying you can do something when you are not ready is dangerous; we want to any unintended consequences," says Castledine.

LGPS Central is currently working with all partner funds to agree the phasing in of services that it will provide and the timeline for taking full responsibility those services.

Entering the fold

Castledine says: "We are in the fortunate position we have a number of former consultants and actuaries which meant we had a good idea of what the service needed to look like."

That meant LGPS Central was able to design it in-house and get ahead of the game in hiring. "Advisory work is a relationship business so the sooner you start to build those relationships the better," says Castledine.

Existing and new partner funds have now had at least a three-month long relationship with their lead consultant at LGPS Central, he adds.

While there is no obligation for the pool to provide investment advice before 1 April, this team has been instrumental in onboarding new partner funds.

"The team of client directors have helped the partner funds to work through all the complex processes, which include making sure LGPS Central understands their existing portfolio and investment beliefs," says Castledine.

Those portfolios have been mapped to the government's nine different asset classes, transition plans have been developed, and consultation has taken place to validate LGPS Central's proposed approach, allowing them to express their opinions, he says.

"I do not know how we would have done all that work without a deep and wide advisory team in place," adds Castledine.

LGPS Central is not the only pool which started to build an advisory service before the government set out its plans.

London CIV chief commercial officer Andrien Meyers says: "We started to expand our services, including providing strategic advice, back in 2024."

The pool had provided the resource to support this build. "We have now established a dedicated team, developed the necessary processes and employed Mercer as a strategic partner to provide additional support," he adds.

Transition

Partner funds' assets also need to be transitioned from legacy arrangements into the pool's stewardship/oversight.

"We have told both our existing and new partner funds their voice will be heard when it comes to the design of any new investment solutions," says Castledine.

The advisory function is playing an important role liaising between the investment team and the partner funds to design the target solutions for each of the asset classes laid out by the government.

"These will incorporate some of the solutions we already have, some that we inherit from Access and Brunel and some new funds that require designing," says Castledine.

It's clear it is the government's desire to reduce the investment fragmentation which currently exists and there will need to be consolidation, he adds.

Matching government need

LPPI has the closest model to how the government wants pools to operate. All its partner funds have had to define a strategic asset allocation for the pool to implement rather than select their own strategies and investment managers.

"LPPI has also provided strategic investment advice since inception and all partner funds have accepted it," says Tomlinson.

"While we have had a smaller number of pooled vehicles compared with others, we have had a huge book of legacy investments we needed to manage," says Tomlinson.

This pool is very familiar with what it takes to implement full portfolio management along with the investment advice, decision-making and stewardship.

Given this background, LPPI will find it less challenging to offer strategic investment advice to its nine partner funds but it will still have to onboard all those funds.

Tomlinson says: "Now we have nine rather than three partner funds, we have a different set of preferences as well as a new government drive framework so we are evolving."

Fit for the future

There will initial phase of getting house in order with a transfer of all assets across to pool oversight irrespective of whether you are an existing partner fund or a new partner fund.

"Like all pools, there will be an ongoing need to upskill and appropriately resource ourselves to ensure we can cover this transfer of the assets into our oversight," says Castledine.

Once that initial phase is complete, LGPS Central will need to finalise what they want target portfolios to look like and then transfer the assets.

"It's all about walking that tightrope of delivering economies of scale and consolidation while also minimising costs of transitioning assets," says Castledine.

There is no point in transitioning assets in a rush just to meet a policy deadline and then realise you need to transition them again six months later, he adds.

The advisory team has mapped everyone's assets to existing solutions but also to a desired future state. "The team is working with investment teams to prioritise the transfer of different assets as well as figuring out the appropriate way of managing legacy assets," he says.

Meyers adds: "As the model matures and we move beyond transition, we'll be able to deliver forward-looking strategic support to help partner funds to shape longer-term investment approaches and move quickly to changing priorities."

Local investment

After the transition phase, the pool will need to focus on local investment by working with administering and combined authorities to generate those investments.

The government has stated every partner fund must have a finalised local investment strategy by September 2026.

"While we are already doing local investments, we will need to spend time developing a more formalised approach to local investment, how it can be optimised and deliver suitable level of return and meet our fiduciary duties.

This is something Paddy Dowdall, our incoming local investment director, will be focusing on working closely with the advisory and investment teams," says Castledine.

Meyers says: "Our plan is to bring everyone together to identify common themes and practical solutions."

London CIV has issued a questionnaire to all partner funds to gather views, preferences and strategic priorities. "The results will enable us to begin shaping potential strategies and delivery models," says Meyers.

Future investments

There is a lot of interest in sustainable and impact investment and the changing landscape. "There will continue to be a lot of work on the development and implementation on these strategies," says Castledine.

If there is a sufficient scale of partner funds wanting to invest in, for example, equities with higher environmental standards, LGPS Central can start to develop these investment solutions alongside existing offerings, he adds.

Adding new partner funds will enable LPPI to take a more granular approach to different asset classes.

Tomlinson says: "Up until now, our equity exposure was through a single global equity fund but in future we will evolve this and near-term we are mirroring some of the equity strategies of the Brunel funds."

From 1 April, LPPI will have a broader range of funds and intends to evolve this in partnership with the new cohort of partner funds

That will evolve into a new product set which will evolve from six to seven pooling vehicles to into the low teens, he adds.

"At the moment, we have one fund per asset class but over time that may expand to two or three different funds for some asset classes," says Tomlinson.

In future LPPI expects to have passive equity options which will be benchmark neutral and some active options which will be benchmark aware, says Tomlinson.

In fixed income, there will also more options which will be externally managed and might, for example, separate out private and public credit to align with the government SAA template.

LPPI's current real estate allocation covers domestic and international covering both residential and commercial. "We might break those apart and also think about how affordable housing will fit in there too," says Tomlinson.

While LPPI has invested in private equity, it does not have much of an allocation to venture and expects to change that in the future, he adds.

Even though it will take the pools 12 to 18 months to work through all these operational challenges, it does not mean they will be closed to new investments, says Tomlinson.

Meyers says: "We're particularly excited about areas where scale, long-term investment horizons and strategic objectives align, including private markets, housing, infrastructure and the energy transition."

Third-party managers

Even though pools will be larger and have more resources, this doesn't mean they will start to manage every asset in-house.

Tomlinson says: "We will decide if managing a particular asset in-house is a credible choice or whether we are indulging in magical thinking."

And if LPPI has the specialist skills, data, systems and market access to be competitive, he adds.

If the answer to these questions is no and it does not make strategic sense for LPPI to manage a particular asset in-house, they will continue to work with external parties.

SAA reviews

Most partner funds have gone through their triennial valuation and review of strategic asset allocation over the last six to 12 months.

"This strategic asset allocation will need to be reviewed by LGPS Central and potentially restated in terms of the nine asset allocation blocks specified by the government. This will be the advisory work we'll undertake for our funds – and is likely to be quite light-touch," says Castledine.

More in-depth principal investment advice, for example to revisit investment strategy and strategic asset allocations will not likely be necessary not for around another 18 to 24 months, unless partner funds wish to undertake the work sooner, he adds.

Meyers says: "While most of our partner funds have completed their SAA and ISS reviews with existing providers, there are a few which have yet to begin that process and we are fully prepared to support them."

Charlotte Moore is a freelance journalist