The government’s Fit for the Future consultation has sparked strong reactions across the pensions industry, with concerns raised over the pace and direction of proposed reforms to the Local Government Pension Scheme (LGPS) in England and Wales. While the consultation is focused on LGPS funds in England and Wales, it is also being closely watched by Scottish LGPS funds, as any significant reforms could influence future policy considerations in Scotland.
The government’s plan aims to accelerate asset pooling, enhance regulatory oversight, and encourage greater investment in UK infrastructure. However, many industry bodies, consultants, and asset managers argue that the changes could introduce significant risks, unnecessary costs, and potential disruption to a system that has been evolving over the past decade.
A significant point of contention is the government’s apparent assumption that the LGPS is in poor financial health and in need of urgent reform. In reality, funding levels have significantly improved, with a reported surplus of £85bn and an aggregate funding level of 107%. Many funds are now fully funded or even in surplus, calling into question the need for rapid structural changes. Critics argue that focusing on short-term changes to pooling, rather than aligning reforms with the next actuarial valuation in 2025, risks introducing unnecessary disruption at a time when the system is in a strong financial position.
The government's push for greater investment in UK assets, particularly in local and regional economies, has also been met with caution. While there is broad support for the principle of local investment, there are concerns that imposing rigid targets could lead to capital being directed into a limited pool of opportunities, driving up prices and reducing returns.
But perhaps the most contentious aspect of the proposals is the government’s intention to give pools a greater role in strategic asset allocation. Currently, individual LGPS funds retain control over these decisions, ensuring that investment strategies align with specific funding needs and liabilities. However, the government proposes that administering authorities "would be required to fully delegate the implementation of investment strategy to the pool, and to take their principal advice on their investment strategy from the pool". Industry bodies have warned that transferring this responsibility to pools could weaken local accountability and lead to a one-size-fits-all approach that fails to reflect the diverse circumstances of different funds. Given that asset allocation is the single biggest driver of long-term investment returns, many argue that it is essential for LGPS funds to remain in control of these decisions to protect member outcomes.
With legislation yet to be finalised, there is growing concern about a potential loss of local control over investment strategies. While individual funds may still make some strategic decisions – such as adjusting their approach based on their fund’s maturity – many decisions will ultimately be guided by advisors who have not been directly chosen or held accountable by the fund itself. Precisely how these advisors are selected and appointed raises questions about the transparency and independence of the advisory process. Appointees may be influenced by the priorities or agendas of those who select them, whether an individual or a committee.
While there may be synergies between LGPS investment and policy aimed at stimulating regional growth, it is worth bearing in mind that the primary purpose of the LGPS is provide pension benefits for its members. The fundamental duty of every administering authority is to secure those benefits and ensure that the investments made on behalf of the fund are designed to deliver the best possible financial outcomes for its members. While non-financial factors – whether it be regional development or ESG targets – can play a legitimate role in broader investment strategies, focusing on them at the expense of financial returns risks a dilution of the fiduciary obligations of administering authorities, which may ultimately undermine the ability of funds to meet long-term liabilities and so compromise the financial security of their members.
If you would like to discuss anything raised in this blog in more detail, please get in touch with a member of the pensions team or your usual Brodies contact.
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