Local government pensions: navigating new policy and potential opportunities

Written By:

Mike Richardson
Member of The Society of Pension Professionals Public Sector Committee, and Head of LCP’s Social Housing Practice

With new policies reshaping the landscape, Mike Richardson explores the opportunities emerging for LGPS funds, from productive investment to fairer treatment of diverse employers

It has been a busy year for the pensions world when it comes to policy. There have been a multitude of developments covering areas such as the conclusion of the government’s review into reforms of the Local Government Pension Scheme (LGPS), the new Pension Schemes Bill and the government’s increased focus on surplus flexibility for private sector schemes.

Focusing particularly on the LGPS, funds are poised to play a pivotal role in both securing member outcomes and driving national economic growth.

I anticipate three key themes will drive the discussion over the coming year:

Materially improved funding levels across the funds and a focus on what that means for contributions
Investment opportunities and the rise of productive finance
Consolidation

In fact, I would say that these themes started to shape the policy and strategic direction of LGPS funds throughout the current year, so this is more of a continued evolution of the position.

From a personal perspective, I work with many organisations that participate in different LGPS funds, helping them to manage their risks and costs. We see a huge range of approaches taken, whether that be to funding, to investment options, or to treatment on exit, and I continue to have concerns over the current “postcode lottery” faced by sponsors. Different employers have very different needs and opportunities, and if I could steer one evolution over the coming year, it would be for funds to adopt a more consistent range of funding and contribution options, providing more flexibility to support those sponsors in focusing on their core activities.

Funding positions are going from strength to strength

It’s been a continued story of strength when it comes to LGPS funding positions. Funding levels have improved significantly, reaching record highs, and it appears these continued improvements are persisting.

On current funding measures, many funds have significant surpluses, which, of course, present options and decisions to make.

Many LGPS funds will have new opportunities to consider contribution levels and to look at wider investment opportunities, without the need to chase high returns to provide future pensions. Some will question the extent to which they should be “locking in” to the current position to reduce future risks.

Of course, there is a balance to be struck, but it’s great the funds are now in a position to be able to ask those questions, rather than having to chase returns and push up contributions in order to fill a deficit, as has often been the case in the past.

An opportunity to focus on finance where it is needed

Given the current strains on public finances, there is a question as to the level of pension contributions being paid into what, in many cases, are very well-funded pension schemes.

Whilst the LGPS funds clearly need to have a focus on ensuring the security and sustainability of their fund, it does seem that there may be an opportunity for a reduction in contribution requirements to better enable councils to focus their resources on local services.

Indeed, this year, the Royal Borough of Kensington and Chelsea Pension Fund’s Investment Committee voted for Council pension contributions to be cut to zero for 2025-26, potentially saving the Council £9 million over the year to 31 March 2026.

That may have been an extreme case, and that particular council had the highest funding level of any LGPS fund. Still, we’d expect other councils may start to look at taking a similar route, albeit maybe not stopping contributions completely.

And whilst the focus of these discussions has been councils which make up the majority of the LGPS, they aren’t the only employers within the LGPS funds – housing associations, care providers, schools, charities and others would all appreciate the ability to focus on their primary functions, should material funding surpluses support a reduction in pension contributions.

Investment opportunities and productive finance

Improved funding levels will offer many funds the chance to explore investment opportunities, with a reduced need to chase high returns to provide future pensions.

Regulatory pressure, evolving fiduciary duties and growing member and societal expectations mean that pension funds are increasingly embracing responsible investment.

At the same time, pension savers are demanding more ethical and sustainable approaches, prompting funds to align investments with public values. Indeed, recent SPP polling indicated that 84% of pension professionals believe ESG considerations should be taken into account alongside investment returns.

This shift is especially relevant for local government authorities who need to balance financial performance with broader social and environmental responsibilities.

For example, LCP recently supported West Yorkshire Pension Fund in understanding what it could do to make its engagement strategy more effective following being challenged about its engagement with the fossil fuel companies it invests in.

I’d expect all funds to be reviewing their policies in this area.

For the pension sector, the government’s growth agenda has also brought about a push for scheme investment to help support productive finance and UK assets.

The government’s view is that investment in illiquid assets like infrastructure to boost UKPLC should be encouraged, and the push to embed this investment in local communities clearly aligns with the ethos of local authority schemes.

It’s fair to say there is also some regulatory caution that is slowing the pace and scale of deployment. Despite this, LGPS funds are increasingly aligning their strategies with central government ambitions, and we will see more of this happening in 2026, particularly as consolidation starts happening at scale.

Consolidation – 2026 is the year

The March 2026 deadline for LGPS investment pool consolidation looms large. The government has an expectation for six consolidated pools with enhanced governance, scale, and capability. This will require significant coordination between funds, pools, and the central government, and should offer the opportunity to benefit from consolidation and to consider more sophisticated investments.

Beyond consolidation, 2026 is likely to bring further regulatory scrutiny, particularly around value for money, climate risk, and member outcomes. The triennial review of LGPS governance frameworks may introduce new standards for transparency, accountability, and stakeholder engagement.

At the local level, funds are exploring how to use their investment power to support place-based growth. Whether through surplus reinvestment, local infrastructure funding, or partnerships with councils, the LGPS is increasingly seen as a catalyst for regional development.

Ending the postcode lottery

There needs to be greater consistency across the LGPS, and a step away from the “postcode lottery” for employers, which affects the ongoing contribution levels and charges when employers exit a fund.

The approach of individual funds to exits in particular varies far more than can be explained by relevant factors, such as the demographic make-up and investment strategy of the funds.

For example, at the current time, two employers with equally well-funded pension sections in different LGPS funds could each exit to discover that one receives a return of surplus via an exit credit, whilst the other is required to pay an exit charge of £millions.

The new governance changes under the Fit for the Future proposals, such as appointing a named officer responsible for the management of the fund and better training requirements for those involved in LGPS, should help, but more is required to ensure a consistent approach to funding – particularly as we expect funds also to start considering adjustments to ongoing contribution requirements.

Importantly, consistency from fund to fund does not necessarily mean consistency from employer to employer.

In particular, whilst the time horizon for a local authority participating in the LGPS will be very long, that is not the case for many other participating employers, such as academies, charities and other not-for-profit organisations, who will have very different time horizons and risk tolerances.

I believe that variation in approach should be driven by these fundamental characteristics, rather than subjective views.

And this really comes back to the flexibility I referred to earlier – it is great when the investment and funding options on offer reflect the needs of individual employers.

I am definitely seeing more examples of flexibility being offered, such as low-risk investment strategies, and funds being happy to have sensible conversations about options, but it still isn’t the norm.

My big hope for 2026 is that a consistent range of options for different sponsoring employers develops, as funds share the experience of increased engagement with employers.

Further reading
Pension professionals warn of ‘disproportionate burden’ from extending LGPS benefits to councillors
SPP publishes paper on DEI in the pensions industry
The Society of Pension Professionals: The impact of Trump’s tariffs on UK pensions