Member Article

Paul Carney takes a look at proposed reforms to the Local Government Pension Scheme and the proposed pooling into so-called “Mega-funds”.

UK Pensions – LGPS Consolidation: a look ahead to 2025 

Following Suzanne Burrell’s commentary looking ahead to what 2025 brings for defined contributions pension schemes, Paul Carney takes a look at proposed reforms to the Local Government Pension Scheme and the proposed pooling into so-called “Mega-funds”.
The Government has started a consultation process in relation to its proposals, outlined by  for the future of the Local Government Pension Scheme (LGPS).

Consultation closes on 15 January 2025 and the Government hopes that by this time, it will have received the opinions of all relevant LGPS stakeholders including the administering authorities responsible for the management of the LGPS’s 86 sections in England and Wales.

The Consultation

The Government’s proposals involve an acceleration of the restructuring which the LGPS has been going through since 2015. Central to its proposals is an intention to quicken the process of pooling LGPS assets. 

As indicated, pooling LGPS funds is not a new concept. It has been the subject of increasing debate over the last 4-5 years although the process of pooling LGPS assets has been under way since 2015. Our sense is that the concept has assumed more political importance since the UK’s exit from the European Union.

Pooling LGPS assets has involved the creation of eight pooled funds.  In the nine years since their establishment, under 50% of assets under management (AUM) in the LGPS are now managed through the eight pooled arrangements. The Government has indicated that this is insufficient and its proposals involve the acceleration of the pooling process so that, by March 2026, all LGPS assets will be managed through eight so-called mega-funds - each fund having average AUM of £50bn.

As the above text indicates, the LGPS is not a single “scheme”. Rather; it consists of 86 sections in England and Wales with each section being managed and administered by an administering authority. 

The Government wishes to change the way administering authorities manage their sections and has asked each administering authority to submit proposals on how pooling will be implemented by the end of March 2025.  Meeting this deadline will be challenging – even without other matters the administering authorities are working hard to deal with.  Other professional commentators have already pointed out that the LGPS is about to go through its next triennial actuarial valuation – a process where its assets and liabilities are valued.  In addition to this project, administering authorities are also striving to manage the fall-out from the Court’s judgment (against the Government) in the case of McCloud. 

Government Proposals

The Government’s plan is for the eight asset pools to become mega-funds by March 2026.  Each fund will have an average of £50bn of AUM and each will have its own investment management company, regulated by the Financial Conduct Authority (FCA). At present, five of the eight pools are FCA regulated.
The rationale for the proposals appears based on the Government's belief that the LGPS, with total AUM believed to be £392 billion, is not fully capitalising on investment opportunities - particularly within the UK. The Government considers that LGPS performance compares unfavourably with other pension funds managed in Canada and Australia and it has drawn on studies which indicate that funds of £50bn or more are demonstrably better placed to take advantage of investment opportunities in, for example, long-term infrastructure projects.

The Government believes that:

• it will achieve significant economies of scale through pooling. Where funds are invested through the eight (so-called) mega-funds funds, each regulated by the FCA, the Government believes that its objectives for reducing costs and maximising investment opportunities will be met more easily;
• funds will benefit from improved governance with each administering authority being required to produce a governance / training strategy and bring more professional, expert input into pension committees. Committees will, for instance, need to appoint a third party pension professional to support them on an ongoing basis; 
• opportunities will be “unlocked”. The term “unlock” has become popular and is used heavily by the Government in articulating its objectives (our understanding is that it shied away from the term “unleash” but the source of this information cannot be identified). The Government believes the reports it has relied on confirm that pooled funds will be able to “unlock” new and better investment opportunities – including in local businesses and the wider national economy. This indicates that pension committees within administering authorities will be encouraged to target investment in local initiatives - although our understanding, based on discussions with administering authorities, is that this already happens.

Before the Chancellor’s Mansion House speech, it was rumoured that the Government might mandate administering authorities to invest pre-established proportions of funds in UK assets. The Government has not gone this far, possibly dissuaded by concerns expressed by many commentators although not mandating authorities means that there is no guarantee that mega-funds will choose to invest LGPS monies in the UK economy. It has been felt that requiring pension scheme assets to be invested in a particular way risks a conflict between the administering authority’s duty to follow Government directions and its fiduciary duties to invest funds with the interests of the scheme beneficiaries in mind. Where a trustee (the administering authority in this analogy) is mandated to invest assets in a certain way, the trustee can properly refuse to accept the mandate as a “fetter” on its discretion in the writer’s view – particularly if the instruction is not consistent with advice it receives from its investment advisers. Alternatively, the trustee might agree to follow the instruction provided that the giver of the instruction is prepared to underwrite the risk of following that instruction by indemnifying the trustee in respect of any loss. It seems unlikely that the Government or any government would be prepared to give an indemnity on such terms.

The Government has also decided against the establishment of a single mega-fund.

Immediate Consequences

For administering authorities there is pressure to act now and to sustain their efforts to implement Government policy over the next 15 months.

The Government intends that relevant assets are moved into the mega-funds by March 2026. To say that this deadline is challenging is an understatement - especially when set against the Government’s intention that each administering authority is involved in the consultation exercise, produces proposals as to how best to implement pooling and then implements said proposals by March 2026.

Conclusion

The consultation exercise marks the first stage in a “next steps” sequence. LGPS stakeholders, particularly administering authorities are under pressure to formulate and prepare responses in time for the close of the consultation period in January 2025. They will then be under pressure to meet the Government’s second deadline of March 2025 - to submit proposals as regards how best to implement the Government’s proposals. 

Assuming the above processes run smoothly with all stakeholders expressing support for the Government's proposed accelerated timetable (an assumption which seems barely credible at time of writing), there will then be more pressure on affected parties to effect the transfers which the Government wishes to be completed by the end of March 2026 – whilst also managing the actuarial valuation process and McCloud.

The proposals involve the transfer of tens of billions of pounds into funds described as “mega” funds and, as indicated above, it has taken over 9 years for under 50% of those funds to be pooled.  It seems unlikely that the remaining 50%+ can properly be pooled over the following 15 months in accordance with proposals which are not due to be received by the Government until March 2025.  It seems likely (therefore) that the Government’s deadline will be missed. Meeting it would likely require steps to be taken in haste - leaving time for leisurely repentance.

 

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