LGPS pooling has not gone far enough, says government

The government has levelled criticism at some pooling arrangements for “very limited progress” on transferring assets and warned that some may not be able to “continue to develop to meet future challenges”.

Under the plans, published in a new consultation paper last night (14 November), the eight LGPS pools will be required to gain authorisation from the Financial Conduct Authority (FCA) and take on a wide range of responsibilities from underlying funds.

The FCA authorisation requirement would present a significant change of direction for the Northern LGPS, Wales Pension Partnership and ACCESS, none of which have a model that requires separate regulatory approval.

The government wants pools to be able to offer investment strategy and asset allocation advice to underlying funds as well as managing all assets. It has proposed a deadline of March 2026 for this new model to be in place.

On mergers of LGPS funds, the government acknowledged that these “can incur significant costs and risk”.

The consultation paper stated: “Nonetheless, a number of LGPS funds have successfully merged on a voluntary basis and the government encourages administering authorities to consider whether there would be benefit in merging with another fund, taking into account final decisions on the reforms proposed in this consultation.”

Andrew Singh, head of public sector investment advisory at Isio, said: “By encouraging greater consolidation, the government is guiding the LGPS to better leverage its scale to deliver better outcomes for members, while playing an even more active role in driving local and national economic growth.

He added: “Enhancing governance and requiring funds to fully delegate asset management to pools will ensure that the LGPS is better positioned to meet future challenges and seize investment opportunities.”

Criticism of pooling
“Limited delegation to the pool has prevented the delivery of the full benefits of scale and resulted in continuing duplication of effort across funds in the same pool,” the consultation stated.

It added that pension committees were making manager selection and asset allocation decisions without necessarily having the required skills or experience “to be discerning and challenging clients of advice”.

In addition, disagreements between funds within the same pool over manager selection could lead to multiple sub-funds being created by the pool, reducing benefits of scale.

“A more efficient model would be for these decisions to be delegated to the asset pool with the capability and expertise to assess options and make robust decisions on behalf of the pension committee,” the consultation said.

The government believes that “full, effective and consistent delegation of strategy implementation is needed” to recognise scale benefits and improve decision-making.

It has set out proposed roles and responsibilities for administering authorities and pools to clarify how investment decisions should be made. The consultation paper includes a proposed template for “high level” strategic asset allocation to demonstrate the kinds of decisions it expects funds and their administering authorities to make.

Local investment
The proposal will also require LGPS funds to set out strategies for local investment and a target allocation – but these will also be ultimately managed by pools.

These local investments should be arranged in partnership with combined authorities and regional mayors to identify suitable opportunities, and funds will be expected to report regularly on progress.

Iain Campbell, head of LGPS investment at Hymans Robertson, said: “We would encourage a realistic timeline 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.”

Legacy assets
While the government wants to accelerate pooling of all assets, it acknowledged that some legacy assets could incur “unnecessary costs” if transferred quickly to pools.

However, it stated that funds would still be expected to transfer management of these assets to their pool, with the pool then expected to ensure it has the capability to manage these assets.

“As pools vary in the capacity and expertise that they currently have to take on this role, the government seeks views on what steps would need to be taken to develop this capacity,” the consultation said.

Conflicts of interest
Hymans Robertson’s Campbell said requiring pools to have control over all assets and investment implementation would be “a monumental change for the funds and likely unpopular”.

“Requiring the administering authorities to take advice on setting investment strategy from the pools, which will then implement the strategy, we believe introduces a potential conflict of interest and may lead to sub-optimal strategies that ultimately cost the LGPS.”

On a client webinar today (15 November), he cited the Competiton and Markets Authority’s (CMA) work on private sector pensions. In 2018, the CMA introduced requirements for private sector schemes designed to separate investment consulting and fiduciary management services and reduce conflicts of interest.

The government’s proposal to have LGPS pools provide investment advice and implementation seems to go against the policy for the private sector, Campbell suggested.

However, he added that proposed governance changes – including a specified LGPS senior officer role – would provide some clarity about managing potential conflicts of interest.