At the beginning of October, the Government's consultation on proposed changes to Local Government Pension Scheme ("LGPS") investments closed. To recap, the proposals form part of the Government's wider "pensions and growth" agenda and are one element of a package of measures spanning both the private and public sector known as the Mansion House reforms. You can read more about the changes proposed for LGPS investments in our earlier updates here and here.

Key questions

While we await the Government's consultation response, we've been reflecting on the proposals and considering some the key questions that have yet to be answered. These include:

  • How will the proposals for increased investment by LGPS funds and pools in private equity be squared with the (quasi) fiduciary duty owed by administering authorities to scheme members?

As established in the Palestine Solidarity Campaign case (which we reported on in 2020 here) LGPS administering authorities have a duty to invest in the best financial interests of members, akin to the fiduciary duty owed by trustees to scheme members.

There is an obvious tension between this duty and the proposal for a requirement that they "target" a 10% investment allocation to private equity (the current average allocation across funds is around 4.3%). Whilst investments in private equity offer the opportunity for greater returns, they also present bigger risks, which, in view of the comparatively strong funding position of LGPS Funds (an aggregate funding level of 103% as at 31 August 2023 was reported in Isio's Low Risk Funding Index), may be difficult for Funds to justify as part of their strategy. What form can the Government's "ambition" for schemes take if it is to achieve its stated aim whilst not coming into conflict with the quasi-fiduciary duty to invest in members' best financial interests?

Similar considerations apply in relation to the proposals regarding "levelling up" investments (where it is envisaged regulations will be amended to require Funds to have a plan to invest up to 5% of assets to support levelling up in the UK). In order for Funds to be able to invest at all the investment will need to stand on its own merits and be an appropriate investment in the context of the Fund's overall investment strategy, but what if an alternative would offer a better return or a similar return with less risk? Will the Government be legislating to amend the duties of Funds in relation to investments to help them navigate these tricky questions? Or will Funds be left to form their own views?

  • How will the conflict between A) the proposals to accelerate the transfer of assets into the existing pools and B) the proposal to reduce the number of pools be resolved?

These proposals seem to us to be more contradictory than complementary – on the one hand seeking to push assets into existing pools and on the other looking to reduce the number of pools, so that some of those pools that have just received more assets may then cease to exist. Perhaps this apparent contradiction can best be explained as a lack of visibility or understanding regarding the amount of work involved in establishing the current pooled arrangements, and in transferring assets in and out of funds.

Pools are bespoke structures and establishing them has absorbed considerable time and costs, both in terms of management time from within administering authorities and professional time from external advisors. Transitioning further assets across to the existing pool arrangements by the accelerated deadline of 31 March 2025 will absorb further time and require more advice from experts, including investment and legal advisers.

Given the complexity involved in establishing the current pools, and in transferring assets into them, careful consideration will be required (particularly around timing) where there is an ambition to drive further assets into the current pooled arrangements, if these may then cease to exist. For some Funds this could lead to duplication of costs where assets are transitioned to one pool, and then have to be moved again when that pool is merged with another. Will this challenge be reconciled in the Government's response to the consultation?

  • Who will pay for all the advice the Funds need to meet the new targets?

On a related note, we envisage the costs of the specialist advice funds will require in order to meet the new requirements for increased and accelerated pooling of assets, and the potential merger of pools themselves will be significant. Will additional resources be made available to Councils, whose budgets are of course already strained? Or is the expectation that the costs will be met by the Funds themselves? Similar considerations will apply in the context of the push for increased investment in private equity and levelling up assets, where again, specialist advice will be required.

  • How will the Government ensure sufficient appropriate investment opportunities are available to allow Funds and pools to meet the new levelling up / private equity asset allocation plans?

If the Government wants to impose duties on Funds to invest in certain types of asset, it needs to be confident that a sufficient number of appropriately packaged assets will be available for investment by pension funds. How will this be achieved? In response to similar (albeit less prescriptive) parallel proposals in the private sector to increase investment in private equity this has emerged as a key concern. In its June 2023 "Pensions and Growth" paper, the PLSA comments that "It is essential to establish a rich and continuous pipeline of enterprises needing investment for providers to bring to market and investors to choose from" and flags that such products (e.g. LTAFs and LIFTs) can take 1-2 years to come to market.

What next?

There's a certain sense of momentum about the Mansion House reform proposals. With the forthcoming General Election looming large on the horizon, if the Government is as determined as it appears to be to press forward with the pensions and growth agenda, we'd expect to see further movement in relatively short order.

The King's speech on 7 November may offer some clues as to what lies ahead when it sets out the agenda for the next Parliamentary session and we fully expect pensions to be high on the agenda in the Chancellor's Autumn statement on 22 November.

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