A new era of LGPS reform

Written By:

Chloe Whelan
Industry Specialist

The government’s latest consultation on LGPS pooling and governance has sparked industry-wide debate, but with ambitious deadlines and sweeping reforms, Chloe Whelan assesses how much is truly feasible

The government’s latest LGPS consultation, Fit for the Future, closed on 16th January. The ambitious proposals spanned several areas: reforming LGPS asset pools, increasing local investment, and strengthening governance. With the response window now closed, the industry is grappling with what these proposals could mean for funds and pools, and how much of the government’s aims can truly be achieved.

The government argues that existing LGPS pooling arrangements have not delivered their full potential – and, it says, “few in the scheme would disagree”. However, several industry stakeholders have questioned whether the proposed approach is the right way forward.

By requiring full delegation of investment implementation to pools, mandating FCA authorisation, and accelerating asset transfers, the government hopes to drive efficiencies and better align investment strategies with national economic priorities. However, some fear that the new framework may, paradoxically, diminish local control and may not even be achievable on the proposed timeline.

Changing investment strategies

One of the most contentious elements of the consultation is the proposal to require LGPS funds to fully delegate investment implementation to the pools, which will also issue investment advice. The government wishes for more complete delegation, arguing that this will bring economies of scale, reduce costs, and enable greater access to private markets.

Under the proposed model:

  • Administering authorities would be required to fully delegate investment implementation to their pool
  • Pools would be the main source of investment advice
  • Pools would be required to be FCA-authorised investment management companies with the necessary expertise and capacity
  • Administering authorities would need to transfer all legacy assets to the management of the pool

Many in the industry have questioned whether this greater delegation is necessary or even possible by the proposed March 2026 deadline. Jill Davys, Head of LGPS at Redington, a Gallagher company, calls the government “disingenuous” for moving the goalposts.

“At the outset, pools were allowed to take different models, so people went down different routes,” she says.

“It’s only recently become clear that there’s a particular route the government want pools to follow, and the timeframes for achieving that are much shorter.”

Another concern is the transition of assets, especially illiquid ones. In fact, less than half (45%) of LGPS assets were invested through pools in March last year, the consultation says. While liquid assets can often be transferred relatively easily, illiquid assets are far more complex. “There’s a very long tail on some illiquid assets, and some funds are concerned that might lead to them being liquidated, which could result in a significant loss of value,” Davys adds.

While the government has proposed that pools take greater management responsibility for assets, it has also recommended they become the primary source of strategic asset allocation advice. This has faced strong opposition from the industry – a PLSA survey found 93% of LGPS members would prefer funds set their own strategic asset allocation, and 65% do not favour them taking principal strategy advice from their pool.1

High-quality investment advice takes capacity, expertise and resources, which many pools simply do not have. Tony English, Head of LGPS Investment at Mercer, expresses concern that this change will remove competitiveness from the advice market, as funds are steered towards just one source of allocation advice: “One of my clients phrased it very well. He said, ‘If you give us advice we’re not happy with, we can sack you.’”

Evidently, while the consultation proposals include sweeping delegation to pools, collaboration between pools and funds will be more important than ever. As Davys notes: “If you are handing 100% of your assets to the pool, you still have fiduciary responsibility. You absolutely need to make sure that your pool is delivering to meet your objectives and the returns you need to pay pensions.”

Encouraging local investment

Another key objective of the consultation complements the government’s broader UK growth agenda, aiming to boost LGPS investment in pools’ local areas as well as the UK as a whole.

That includes a proposal that administering authorities should set a target range for local investment, with pools ultimately responsible for conducting due diligence and making the final decision on whether and where to invest.

A notable change in this consultation is the revised definition of “local”, to mean not just UK-wide but also consideration of investments that are local to a specific pool. This shift may well be welcomed by members, due to the potential for their pension investments to contribute to development in their own backyards – and for this reason, it’s a journey on which many LGPS funds have already embarked.

“The government is pushing at an open door in terms of encouraging UK investing, because there have been lots of examples of successful UK investments so far, from renewable energy, energy transition, private equity,” Mercer’s English says.

However, this extra-local approach also brings complications, such as around the availability of diverse investments in every local area. English likens this to a “postcode lottery”.

“London CIV is clearly an urban pool. That means if it invested in UK wind and solar, that may not count as local, but surely the government would welcome that investment,” he says.

“On the other hand, while London is fantastic if you want to invest in private equity or venture capital, less urban areas have fewer opportunities in those asset classes.”

One proposed solution to this challenge is a less rigid approach to locality. Funds could first look at their local areas when considering investment opportunities, but if no suitable investments exist, they could then explore other regions in the UK.

Alternatively, a structure such as the British Business Bank could help pools explore co-investment opportunities both within and outside of the LGPS to broaden their investable opportunities.

Consultation fatigue

The content of the proposals aside, many in the industry feel a sense of fatigue and instability after so many policy shifts. While some see this consultation as a logical next step in the long-term process of pooling, others feel it represents a fundamental shift that requires major adjustments in a short period.

For many LGPS funds and pools, the consolidation process has already been long and complex. Some pools are already FCA-authorised and well on their way to meeting all the new requirements by the government’s deadline. LGPS Central, for instance, said in its consultation response that the deadline is “ambitious but achievable” in its case.

However, not all pools are in this position. The PLSA’s research found that while 74% of LGPS fund members support FCA regulation for all pools, 59% believe the deadline to achieve all requirements of the proposed model is unachievable.

The timeline pressure is compounded by broader regulatory uncertainty. The previous government had already set a target for pooling all listed assets by March 2025, but this government has now expanded that to include all assets – listed and unlisted – within an FCA-regulated structure.

This is on top of previous consultations about the sector, many of the outcomes of which are still unclear. In fact, according to English, this sense of ongoing instability may prove counterproductive for the government’s goals.

“This consultation is so broad, and bandwidth has just been completely used up,” he says.

“With a few exceptions, that door [to increased UK investment] has closed temporarily while people try to digest the changes.”

The consultation signals a new era for the LGPS investment model, with some of the changes warmly welcomed. However, many in the industry remain wary of the speed and scale of change. The sector is now awaiting the government’s response, hoping that the final regulations will strike a balance between ambition and feasibility.

 

1. https://www.plsa.co.uk/News/Article/PLSA-SUPPORTS-AIMS-OF-MANSION-HOUSE-PROPOSALS-BUT-WARNS-OF-IMPLEMENTATION-ISSUES-UNINTENDED-CONSEQUENCES-AND-CHALLENGING-TIMELINES

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