Government plots LGPS mergers in Pension Schemes Bill

Chancellor Rachel Reeves has announced plans to merge local authority pension funds into a “handful of megafunds” to boost their capacity to invest in infrastructure and local assets.

The government will set up an independent review for each of the 86 Local Government Pension Scheme (LGPS) funds in England and Wales with a view to driving mergers, under plans to be set out by the chancellor in her inaugural Mansion House speech.

The local government bodies responsible for each megafund will be required to specify a target for investing in the local economy.

In a press release from HM Treasury, published last night (13 November), the department claimed that a 5% target would secure £20 billion worth of investment in local communities.

The “megafunds” will be authorised and regulated by the Financial Conduct Authority, the Treasury stated.

The governance of the LGPS would also be “overhauled to deliver better value from investment decisions”.

The Treasury gave no details as to what this overhaul would involve, but claimed that “independent research suggests could free up money in the long term to support local public services”.

Deputy prime minister Angela Rayner, who is also the Secretary of State for Housing, Communities and Local Government, said: “We’ve all seen the fantastic work carried out day in, day out, by our frontline workers and it’s about time their pension started working just as hard by driving investment in their communities.

“This is about harnessing the untapped potential of the pensions belonging to millions of people, and using it as a force for good in boosting our economy.”

Anticipating change
Our recent survey of professionals within the LGPS found that there was little support for merging the system into one fund, as has been rumoured ahead of Rachel Reeves’ speech. However, many respondents predicted some form of consolidation.

“Indicating a direction of travel that leads to fewer funds is possible,” said one respondent. “However, even that would require a project of unprecedented scale, and the impact on scheme members – for example, the ability of funds to resource administration during years of uncertainty – needs to be properly considered.”

Reeves’ announcement builds on the work of the previous chancellor, Jeremy Hunt, who used his 2023 Mansion House speech to unveil the Mansion House Compact, an agreement with several major pension providers to target a 5% allocation to UK assets.

Hunt’s speech also paved the way for subsequent work on “productive finance”, which has seen a number of pension schemes – as well as most of the LGPS pools – increase their allocations to UK infrastructure, real estate and private equity.