The Government recently shared the long-awaited Final Pensions Investment Review report following consultations which concluded earlier this year. The report details several reforms concerning asset pooling, investment and governance for the Local Government Pension Scheme (LGPS) in England. The publication of the Pension Schemes Bill subsequently followed and includes provisions to implement some of the reforms detailed in the report.
Reform and modernisation of the LGPS has been a central aspect of the Pensions Investment Review given that the LGPS plays a crucial role in achieving several important government and national priorities. Recognising the scheme's significant scale, with a valuation of £400 billion and 6.7 million members relying on it, the Government has committed to its continuous improvement.
The consultation responses highlight a shared sense of commitment across the industry to ensure that the LGPS is efficiently managed to provide greater financial security for its members whilst also benefiting local communities across the broader UK economy. Alongside this, the Government is eager for the LGPS to use its scale to boost UK investment and regional growth by leveraging its local connections and partnerships to support housing, key infrastructure and regeneration projects across the UK. The Government acknowledges that these changes may cause some disruption, however, they assert that these reforms represent the most significant and transformative changes to the LGPS in a generation.
Minimum Standards for Asset-Pooling
The consultation response confirms the proposed minimum standards for asset pooling. The government mandates that all Administering Authorities (AA's) must delegate the implementation of their investment strategies and principal investment advice to their respective pools and transfer all assets to the pool's management. Additionally, the pools will be required to conduct due diligence and manage local and regional investments, as they will operate as FCA-authorised regulated investment management companies.
Transition Proposals
During the consultation, the Government asked each pool to submit a transition proposal for meeting minimum standards by the proposed deadline. After reviewing the proposals, six out of eight pools were supported by the Government with the AA's participating in the remaining two pools urged to form new partnerships. There is a March 2026 LGPS asset pooling deadline set for meeting the standards, and whilst the Government has expressed voluntary pool membership is preferred, the recent Pension Schemes Bill has introduced a new power to direct an AA to join a specific pool if necessary.
Local and Regional Investment
The LGPS has a strong track record of local and regional investment, which the government aims to build upon to accelerate growth in communities. The consultation response requires AA's and pools to collaborate with local authorities and other relevant bodies on growth plans, with the National Wealth Fund working with the LGPS to address finance gaps and support clean energy goals. The consultation responses also indicated support in strengthening collaboration between AAs, pools, and strategic authorities to maximise investment opportunities.
Governance
The consultation response also outlines reforms to improve LGPS governance based on recommendations from the Scheme Advisory Board’s 2021 Good Governance Review. The reforms set out that AA's will undergo a governance review every three years, and pension committees must include an independent member who is a pensions sector professional, acting in an advisory capacity rather than a voting member. Pools must include one or two shareholder AA representatives, however the consultation response does not impose a single model for how shareholders and scheme members are represented in their pool's governance allowing for flexible governance structures tailored to shareholders' and scheme members' needs.
Industry Responses
Industry professionals have responded to the Final Pensions Investment Review report, overall, the focus on value for money has been welcomed but concern has been expressed about the potential impact on members' outcomes and mandated investment. In particular, the PLSA (now Pensions UK) has questioned the need for the new power to direct an authority to a specific pool on the basis that "such decisions require highly specialised and localised knowledge of the funds' specific circumstances", stating that such a power should only be used as a "last resort".
British Growth Partnership
It was announced as part of the Final Pensions Investment Review Report that London CIV has become the first LGPS pool to declare its intention to work with the British Business Bank on launching the British Growth Partnership, an initiative which seeks to encourage more UK pension fund and other institutional investment into the UK’s fastest growing and innovative companies. London CIV has identified the investment potential in supporting early-stage high-growth UK companies and is consequently evaluating a variety of funds that are seeking to raise capital to invest in the UK. This aligns with the perspective of BVCA, Chief Executive, Michael Moore, who stated "Countries like Canada and Australia show that when pension funds invest in private capital, you help the national economy and deliver better retirement outcomes. The Government should be applauded for learning from their example".
Conclusion
The developments summarised above mark a transformative period for the LGPS, with the Final Pensions Investment Review report and publication of the Pension Schemes Bill set to implement key reforms.
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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