The Society of Pension Professionals’ (SPP’s) latest column for Professional Pensions, looks at the government’s plans to accelerate LGPS pooling and get council schemes to invest more in private equity and levelling up.
In July 2023, the government launched a radical consultation on the future of Local Government Pension Scheme (LGPS) asset pooling. Some 152 submissions were put forward, including one by the Society of Pension Professionals (SPP).
The Autumn Statement contained the government's response. Although further details are needed, concerns remain about the government's proposed use of powers to advance its agenda. As part of these changes, the government will:
- Set out in revised investment strategy statement guidance that funds should transfer all assets to their pool by 31 March 2025, setting out the rationale, value for money and date for review for any assets not pooled.
- Amend regulations to require funds to set a plan to invest up to 5% of assets in levelling up the UK, and to report annually on progress against the plan.
- Revise guidance to require funds to consider investments to meet the government's ambition of a 10% allocation to private equity.
- Revise pooling guidance to set out a preferred model of pooling including delegation of manager selection and strategy implementation.
These reflect the Chancellor's Mansion House proposals for greater consolidation and investment in UK assets and the wider, non-pensions, agenda to level up economic opportunities across the UK. For well-funded open schemes like the LGPS, the argument to increase investment risk may seem compelling. Furthering the levelling up agenda might also be attractive, especially in an election year.
Accelerating pooling concessions
The original exhortation for all assets to be pooled by March 2025 is sensibly downgraded to a "comply or explain" regime, acknowledging illiquid assets cannot easily be pooled by an arbitrary date.
The consultation considered assets must be formally co-owned to be properly "pooled". Assets held under common management, particularly those invested passively with insurance companies (rather than pool operators), would not qualify.
Because nearly all the pools have a common ownership vehicle (an authorised contractual scheme), this would, government argued, be easy to achieve. At a stroke, £114bn of passively managed assets could be moved to pool operators, growing their internal management capabilities and meeting another government ambition, pools with at least £50bn under management. The final consultation only contains a reporting obligation to differentiate between externally managed (under pool management) and "pooled" (i.e. co-owned) assets.
A fiduciary duty quandary
LGPS assets are not public money; they do not belong to central government. Assets are owned by the relevant authorities, which are fiduciaries entrusted with assets to pay pensions to LGPS members. That statutory purpose overrides any government ambition to use assets for other purposes (however laudable).
The government's final response states it does not believe the levelling-up and private equity proposals cut across fiduciary duties. That puts a lot of weight on the words "plan" (for a 5% levelling-up allocation) and "ambition" (for 10% in private equity).
Questions inevitably remain about the investibility of levelling-up, but government made it clear that publicly listed investments will not count. Government considers the fiduciary duty circle can be squared by regarding levelling-up as a non-financial factor that funds may have regard to in justifying potentially lower returns.
On private equity, government cited that the LGPS is "largely well-funded and has a very long- term horizon" in support. Also, that private equity investments should "only be made as part of an appropriate and diversified investment strategy which aims to provide good returns in the interests of scheme members, employers and local taxpayers". However, funding levels are not guaranteed and funds owe fiduciary duties to members, not employers and local taxpayers.
A preferred pooling model?
Some 62% of respondents opposed this idea, yet government is determined to press ahead, even if in statutory guidance. After seven years of pooling, eight different models have emerged, each reflecting complex agreements between the parties. Some include a combination of investment management and advisory mandates for pool operators, but others do not (as a matter of conscious design). The SPP believes business models are best chosen, not imposed.
Clifford Sims is a the outgoing chair of the SPP's public sector group and a partner at Squire Patton Boggs