Government to press ahead with reforms tackling “fragmentation” of LGPS, boosting local investment

The Government has confirmed it will implement all the core proposals contained in its recent consultation on the future of the Local Government Pension Scheme (LGPS) in England and Wales.

In its Pensions Investment Review: Final Report, published last week, the Ministry of Housing, Communities and Local Government said the focus of the review for the LGPS had been to look at how tackling fragmentation and inefficiency can unlock the investment potential of the scheme, including through asset pooling and enhanced governance, while strengthening the focus on local investment.

“As one of the largest pension schemes in the world, set to grow to £1 trillion by 2040, it is critical that strong and sustainable foundations are embedded, in the best interest of scheme members, employers and local taxpayers,” the MHCLG added.

It said feedback to the consultation on a package of proposed reforms to the structure, investments, and governance of the LGPS had indicated a “broad consensus” on the need for minimum standards on asset pooling, maintaining a focus on local investment and enhancing the governance framework of the scheme.

The consultation had included proposals in three areas:

• Reforming asset pooling by mandating certain minimum standards deemed necessary to strengthen the foundations of the scheme in line with international best practice.
• Boosting investment in local areas and regions by requiring that:

- Administering authorities (AAs) set out their approach to local investment in their investment strategy including a target range for the allocation, and to have regard to local growth plans and priorities in developing their investment strategy

- AAs work with strategic authorities (Combined Authorities, Mayoral Combined Authorities, Combined County Authorities and the Greater London Authority), or in areas where there are none of the above another designated authority, to identify local investment opportunities

- pools conduct appropriate due diligence on potential local investments and make the final decision on whether to invest

- AAs set out their local investment and its impact in their annual reports

• Strengthening the governance of LGPS AAs and LGPS pools, building on the recommendations of the Scheme Advisory Board (SAB) in their 2021 Good Governance Review.

In its response to the consultation, the MHCLG confirmed that all core proposals would be implemented, and provided additional detail where respondents requested clarity “in particular, on the delineation of decision making between AAs responsible for setting the investment strategy, and the pool responsible for all implementation decisions, including the choice of active or passive managed investments”.

The Ministry noted, however, that responses to the proposals on pooling were “varied”.

It said: “Many were supportive of the government’s vision for pooling, but responses ranged from significant concern over the direction of travel to those who felt the proposals did not go far enough. Particular areas of concern were loss of local autonomy on investments, the requirement for AAs to take their principal investment advice from their pool, a perceived lack of ways for AAs to hold an underperforming pool to account, and transition costs.”

Among respondents who did not agree with the direction of travel, the Government observed there was nonetheless “general agreement” that the minimum standards proposed wee an appropriate way of delivering the Government’s vision.

For the proposals on local investment, the MHCLG observed “strong support” from respondents.

It said: “Most respondents felt that local investment was an important part of the LGPS’s role and were supportive of protecting it, though there were some concerns raised regarding conflicts of interest and fiduciary duty. In the context of the reforms to pooling, there was a broad acceptance that pools should have the ability to make such investments and to carry out due diligence on such projects.”

Lastly, the proposals on fund governance were welcomed, the MHCLG reported. It noted: “Respondents generally supported the move to bring the governance standards of the whole scheme up to a common baseline and were pleased that government had listened to the recommendations of the Scheme Advisory Board. Similarly, respondents agreed that asset pools should report consistently and transparently on performance and costs, and shareholders should be appropriately represented in pool governance.”

The LGPS consultation was also supported by the Government Actuary’s Department (GAD).

Jim McMahon, Minister of State for Local Government and English Devolution said the consultation “fundamentally improves fairness in and access to the LGPS, addressing key issues that have been neglected for too long and treating them with the urgency they deserve.”

Lottie Winson