Government urged to “seriously reconsider” LGPS proposals

Industry bodies, consultants and asset managers have all expressed concern about the government’s plans to overhaul the Local Government Pension Scheme (LGPS).

Responding to the “Fit for the future” consultation, which closes on 16 January, the organisations have criticised the tight deadline given to pools to submit a plan for how they will achieve the government’s plans.

The government wants LGPS pools to all be regulated by the Financial Conduct Authority (FCA) and to be able to provide strategic asset allocation advice to their partner funds, as well as full implementation of investment decisions. All eight pools are expected to explain how they will achieve this by 1st March 2025.

The Society of Pension Professionals (SPP) has urged policymakers to “seriously reconsider” its plans and to revise the associated timescales.

The SPP argued that the deadline seriously constrained the ability of pools to undertake a full assessment of the merits of the different options the government has proposed.

“We are not at all convinced of any merit in forcing those pools to change their approach, incurring further unnecessary costs and fundamentally changing the relationship between partner funds that has built up successfully over the last decade,” the society stated.

Kirsty McLean, chair of the SPP’s public sector group, said: “While it is right for government to challenge the sector to assess its progress, the type and pace of changes being proposed run the risk of derailing some of the good work of the last decade, as well as impinging on administering authorities’ fiduciary duties.

“Within the LGPS it is not clear how these proposals will meet either of the government’s objectives of improving pension outcomes for members or increasing investment in the UK. As a result, we are urging them to carefully reconsider both the nature and pace of some of these proposals.”

Robbie McInroy, head of LGPS client consulting at Hymans Robertson, described the proposed timelines as “hazardously ambitious”.

Disagreement over strategic investment advice
Zoe Alexander, director of policy and advocacy at the Pensions and Lifetime Savings Association (PLSA), said the government’s proposals for strategic asset allocation and investment advice “require further consideration”.

She added: “Funds must remain accountable to members, employers, and taxpayers for performance. A pragmatic approach will also be essential to ensure compliance within the proposed timeframe.”

The government wants pools to build up internal expertise to help provide strategic advice to funds on top of implementing decisions. However, several respondents to the consultation called for a rethink on this element of the proposals.

The PLSA said asset allocation was the “most crucial factor” in long-term investment returns. This meant that, as individual LGPS funds were accountable to members, employers and taxpayers, they needed to retain control of these decisions.

LGPS funding position calls reforms into question
Hymans Robertson – which advises a number of LGPS funds in England and Wales – expressed disappointment that the consultations’ premise was set around the LGPS being in poor health.

McInroy said: “It implies it is inefficient, fragmented and ‘not fit for the future’. We do not believe that this is the case.

“This has already raised frustration with the LGPS funds and pools and ignoring these concerns would be detrimental to the government’s ambitions to encourage change.

“We believe the proposed changes outlined in the government’s consultation would create a number of risks and unintended consequences for the LGPS.”

The LGPS has also enjoyed a period of improving funding levels, with the system in England and Wales recording a surplus of £85 billion at the end of December 2024, according to Isio, ahead of its next triennial valuation.

Isio’s latest update to its Low-Risk Funding Index for LGPS funds found that the 86 funds collectively had more than £415 billion in assets with an aggregate funding level of 125%. Almost all (83) were at least 100% funded.

Steve Simkins, partner and public services leader at Isio, said this improved position was “no longer a market blip, but the new normal”.

“The short-term focus of getting all assets into the LGPS pools by 1st April 2026 and investing £20 billion of this into local and regional economies, is starting to feel misplaced,” Simkins added.

“Better outcomes could be achieved by concentrating on the actuarial valuation deadline of 31st March 2025, which will reset employer contributions and investment strategies for the next three years. More pooling can follow and then be structured in way which best fits into a future with lower net cashflows and reduced risk levels.”

Pooling deadlines could “stagnate” UK investment
Gresham House, an asset manager specialising in UK investment, warned that the proposed changes could cause a period of stagnation in terms of UK-focused investments.

Anthony Dalwood, chief executive officer at Gresham House, said: “Delegating investment strategy implementation to pools will require substantial time, investment, and resources to attract and retain the necessary talent.

“Furthermore, the complexity of the transfer of assets should not be underestimated. The process will be costly and complex, as pools must familiarise themselves with the legacy strategies and liabilities of all their partner funds.”

Hymans Robertson’s McInroy added: “We are supportive of the policy direction on local investment. However, we would encourage realistic timelines for the LGPS to increase local investments to allow for a flow of newly originated local project opportunities to be created.

“This will avoid forcing capital into a small set of opportunities, ‘bidding up’ prices and pushing down returns. The investment will be incredibly important in the potential for improving local areas, but if delivered poorly it could do harm.”