“Fragmentation and waste”: Government sets sights on LGPS

The government has targeted a reduction in “fragmentation and waste” within the Local Government Pension Scheme (LGPS), as part of the first phase of its much-anticipated Pensions Review.

Funds within the LGPS could be mandated into consolidation if the government is unsatisfied with pooling progress by March of next year, the government announced on Saturday evening.

The government stated that it wanted to address the estimated £2 billion in fees that the LGPS pays out every year, as well as improve the system’s ability to invest in productive assets such as infrastructure.

A joint press release from the Treasury, the Department for Work and Pensions and the Ministry for Housing, Communities and Local Government (MHCLG), stated that the government “will consider legislating to mandate pooling if insufficient progress is made by March 2025”.

“The LGPS in England and Wales is the seventh largest pension fund in the world, managing £360 billion worth of assets,” the release said. “Its value comes from the hard work and dedication of 6.6 million people in our public sector, mostly low-paid women, working to deliver our vital local services.

“Pooling this money would enable the funds to invest in a wider range of UK assets and the government will consider legislating to mandate pooling if insufficient progress is made by March 2025.

“To cut down on fragmentation and waste in the LGPS, which spends around £2 billion each year on fees and costs and is split across 87 funds – an increase in fees of 70% since 2017 – the Review will also consider the benefits of further consolidation.”

Angela Rayner – deputy prime minister and the Secretary of State for Housing, Communities and Local Government – said: “After putting in years of hard graft serving their communities, the very least our frontline workers deserve – millions of whom are low paid, millions of whom are women – is dignity and security in retirement.

“That’s why we want to make sure their hard-earned money works harder for them so we ensure they receive the pensions they have earned, while unlocking growth across our economy.”

Cost cutting in the LGPS
The 70% increase since 2017 coincides with the introduction of the LGPS Code of Transparency, which helped cast new light on asset management costs that were previously unreported.

In addition, several of the pools have reported significant cost savings as they have grown and launched pooled investment funds for their underlying clients. For example, the Brunel Pension Partnership estimates that it is saving £41 million a year for its partner funds, a figure it expects to reach £43 million in 2025.

Rachel Elwell, chief executive of Border to Coast Pensions Partnership, said: “Our focus is on delivering a strong and sustainable LGPS to enable it to pay the pensions of the 6.6 million local government workers in an affordable and sustainable manner.

“Through the commitment and support of our partner funds, Border to Coast has developed innovative and cost-effective investments, while cutting private market fees by almost 30%.

“We welcome the opportunity to work with the government on a coordinated review to consider how the LGPS can continue to deliver for hard-working members, generate even greater value to local taxpayers, and deliver productive investment in the UK.”

The announcement is part of a wide-ranging and ambitious review of the pension system that will be overseen by the new pensions minister, Emma Reynolds, with support from Jim McMahon, the minister of state within MHCLG.

The focus of this first phase of the review will be on UK investment and measures to support the Pension Schemes Bill, announced in last week’s King’s Speech.