LGPS consolidation: Warning over loss of investment autonomy

In a statement published last night, the Treasury announced plans to merge local authority pension funds into a “handful of megafunds” to boost their capacity to invest in infrastructure and local assets.

In an interview with the Financial Times, chancellor Rachel Reeves said the government was targeting eight funds – implying that the existing pools within the Local Government Pension Scheme (LGPS) could be used to advance the consolidation agenda.

Zoe Alexander, director of policy and advocacy at the Pensions and Lifetime Savings Association (PLSA), highlighted the “substantial consolidation” already completed in the LGPS through pooling, which she said had brought “many positive results”.

She said the PLSA supported the “completion” of pooling, but warned that “care must be taken to ensure this is done in a pragmatic way that is not destructive of value nor incurs unnecessary investment losses or costs”.

Andrew Singh, head of public sector investment advisory at Isio, warned that merging LGPS funds into a few large entities “raises concerns over indirect influence on LGPS investment decisions”.

“By pooling assets into fewer, larger funds, there is a risk of shifting asset allocation decisions away from local control, potentially compromising the autonomy that has been fundamental to LGPS governance,” he said.

The government intends to set the consolidated LGPS funds a 5% target for investing in their local communities.

Simon Kew, head of market engagement at Broadstone, said LGPS megafunds “will need to deliver true consolidation” of management to achieve the impact the chancellor is aiming for.

“It is pleasing to see an emphasis on supporting local growth given the strong track record some LGPS funds have investing in their area,” he added.

Michael Moore, chief executive of the British Private Equity & Venture Capital Association, also welcomed the LGPS plans, calling the public sector system “a key source of capital for fast growing businesses and start-ups”.

“It is also right that there should be provision to ensure that the LGPS can invest more in growing the UK’s regional economies,” he added.

However, Alistair Russell-Smith, head of the corporate advisory practice at Spence & Partners, said the LGPS should learn lessons from private sector DB schemes, particularly regarding access to surplus assets.

He explained: “Currently employers in LGPS can only access a surplus when their last employee leaves pensionable service, and even then, distribution of the surplus is at the discretion of the fund… This is no incentive for employers to participate in LGPS.

“If we’re going to look at ongoing surplus distribution in private sector DB, let’s also look at it in the LGPS. This will then give the sort of framework that will encourage charities, housing associations, universities and other institutions to participate in the LGPS, critical if the system is to thrive beyond the councils and other public sector bodies that must participate.”