The £400 billion question: should the LGPS become a sovereign wealth fund?

Written By:

Barry McKay
SPP Public Sector Committee member
Head of Public Sector Consulting, Barnett Waddingham

With £400 billion in assets, the LGPS looks like a sovereign wealth fund in waiting. Barry McKay argues it should stay exactly as it is

The idea of transforming the Local Government Pension Scheme (LGPS) into a sovereign wealth fund (SWF) has over the years been mooted as a reasonable proposition. At first glance, the similarities, namely large pools of capital, long-term investment horizons, and public interest with taxpayers effectively backing the Scheme, make the comparison sensible.

However, whether the LGPS should, or even could, become a SWF is more complex and requires weighing the benefits against significant risks, structural differences, and the ultimate purpose for which the money is held.

What would “becoming a SWF” mean?

A SWF is typically a state-owned investment fund designed to manage and use national savings to provide long-term financial returns, but also achieve broader economic objectives and enhance fiscal stability which benefits the country’s population. The largest example of a SWF is Norway’s Government Pension Fund Global.

For the LGPS, a move to a SWF could mean:

Moving from a member-focused pension scheme to a national investment vehicle
Greater centralisation of decision-making
Stronger mandates to invest in UK economic priorities (infrastructure, growth sectors etc.)
Potentially reduced emphasis on liabilities and risk management including funding
The need to provide a crown guarantee for the underlying pension liabilities

The case for transformation into a SWF

Given the above, it is worth taking a more detailed look at the case for transforming the LGPS into a SWF.

1. Greater Economic Impact
The LGPS already manages over £400 billion of assets. If structured like a SWF, it could invest more heavily in UK infrastructure and innovation, support regional growth aligned with “levelling up”, and provide capital for long-term national projects. This could therefore amplify its role as a driver of economic development.

2. Scale and Efficiency
Pooling has already improved efficiency, but a full SWF model could create even greater economies of scale and reduce duplication across funds. It could also enable access to large, complex global investments.

In theory, this could improve net returns but as we have seen, scale does not guarantee better investment returns.

3. Strategic Investment Capability
A sovereign-style LGPS could take a more deliberate role in the energy transition to renewables, housing and transport – and in strategic sectors such as technology and AI. This would align investments with national priorities in a more co-ordinated way.

The case against such a transformation

1. Loss of Member Focus
The LGPS exists to pay pensions, not to act as an economic policy tool. Becoming a SWF risks diluting fiduciary duty to members. It also risks prioritising political or economic goals over returns and increases the risk of underperformance. Given the purpose of LGPS assets could change fundamentally this is a key concern.

2. Governance Risks
The current LGPS model benefits from local accountability, clear (and improving) governance structures and a separation from central political control and (in theory) political interference. In particular, the LGPS benefits from clear governance structures and as we know recent consultations and guidance will look to enhance governance further.

On the other hand, a SWF could introduce greater political influence on investment decisions and, with changing governments, could lead to instability and poorer decision making. There may also be pressure to invest domestically even when doing so is not optimal. Furthermore, there may be reduced independence and oversight.

History shows that politicised investment decisions often lead to weaker outcomes.

3. Funding Discipline Could Weaken
Unlike most SWFs, the LGPS has defined liabilities, regular actuarial valuations and employer contributions linked to funding levels.

A shift to a SWF could weaken:

The link between assets and liabilities
Incentives for a prudent funding approach
Transparency around pension affordability

This could ultimately threaten the long-term sustainability of the LGPS.

4. The impact on UK government finances
SWFs do not usually have an associated long-term liability relying on the availability of cash as required – in this case LGPS member pensions. Currently, those liabilities are ultimately underwritten by employers, which in the case of councils, means local taxpayers.

In a case where the UK government steers the investments of the scheme leading to lower returns and/or difficulty in securing cash availability, then the expectation would be that the UK government would provide a crown guarantee as it does with the unfunded public service schemes.

This outcome could have two potentially significant impacts on government finances, firstly via cash calls on HM Treasury to pay LGPS pensions and secondly by the inclusion of the schemes’ liabilities on UK debt.

The LGPS is already successful

The LGPS is widely regarded as one of the most successful public sector pension systems in the UK. Its strength lies not in a single feature, but in a combination of sound governance, long-term investment strategy, flexibility, and strong stakeholder value.

Investment returns

Crucially, the LGPS already works well and is a success story. The LGPS is designed as a long-term investor, which is one of the key drivers of its success. It has delivered, and continues to deliver, strong long-term investment returns, with an average annual return of circa 7% p.a. over the last 10 years and still stronger returns over the longer term (circa 8% p.a.). With liabilities stretching decades into the future, the scheme can already invest in a diversified range of assets, including equities, infrastructure, private equity, and real estate while achieving its fiduciary duties.

The introduction of asset pooling in England and Wales has been a significant step forward. By consolidating assets into larger investment pools, the LGPS has achieved:

Reduced investment management costs
Increased access to more sophisticated investment opportunities
Greater bargaining power with fund managers
A position of leadership on responsible investment

Pooling has enhanced efficiency without removing local accountability, striking a balance between scale and governance that is rare in pension systems.

Strong governance and local accountability

One of the defining strengths of the LGPS is its governance framework. Unlike highly centralised pension schemes, the LGPS operates through a network of locally administered funds. This structure maintains oversight, strengthens accountability, and ensures that decision-making is closer to members and employers.

Strong funding and sustainability

Compared to many other public sector pension schemes globally, the LGPS is relatively well-funded. Regular actuarial valuations ensure that contribution rates are aligned with long-term liabilities and typically achieve stable employer contributions.

This has resulted in the funding level of LGPS funds being better now than they have been for a long time, resulting in employer contributions reducing.

Value for members and taxpayers

At its core, the LGPS delivers strong value and financial security to its members by providing pensions which are protected from high inflation. Such pensions also provide value to the taxpayer over the long term by reducing the strain on state benefit payments.

The LGPS stands out as a successful pension scheme because it combines strong governance, long-term investment discipline, efficient scale, and a clear focus on member value.

Its ability to balance local accountability with national collaboration, alongside a commitment to sustainability and continuous improvement, makes it a model for pension systems both within the UK and internationally. In summary, if it ain’t broke, don’t fix it!