Government consultation on LGPS Investment: Fit for the Future
Investment

In her Mansion House speech in early October the Chancellor, Rachel Reeves, spoke of her intention to legislate on measures to consolidate the Local Government Pension Schemes into eight so-called ‘megafunds’.
At the same time the Government issued a consultation on getting all of the assets in these 86 LGPS funds into the eight existing pools, accelerating previous pooling plans with the express ambition of driving investment into growth businesses and infrastructure.
We continue to engage with the Government and responded to the Fit For The Future consultation in time for its closure on 16 January. The key points from our response are set out below, covering timing, the importance of doing fiduciary management well and the need to consider employers and funding levels when setting the investment risk profile.
We also covered the consultation during the consultation period in this Insight article.
Pooling is the right thing to do, but do it at the right time
Isio supports the pursuit of larger, better value dedicated investment managers delivering improved risk adjusted returns and better overall outcomes through further pooling of assets. But the timing of this planned acceleration in pooling is overly optimistic and it fails to take into account the significant LGPS funding gains since the last valuation. With the next valuation due to complete on 31 March 2026, a better approach would be to focus on this now and pooling later.
If pooling continues to be the priority, the proposed timetable for submitting proposals by the end of March 2025 and for implementation by 1 April 2026 is too short for practical reasons and has the potential to undo the good outcomes that pooling can achieve.
Fiduciary Management oversight (not oversight)
Fiduciary Management has been employed by trust-based (mostly private sector) defined benefit pension schemes and other institutional investors for some years now. It is a tried and tested approach with clear investment, governance and administration advantages, but with some risks and possible drawbacks.
However, in the pensions market to date, a Fiduciary Management approach has largely been employed by single-employer trusts. The LGPS is a large, complex, segregated multi-employer scheme, and a careful and nuanced approach to setting principles and objectives on a fund-wide basis will be required. The Fiduciary Manager will be required to balance a lot of complex information to ensure that individual fund’s assets are being invested appropriately and in line with their bespoke financial and ESG objectives. A big responsibility will rest on the pools and their ability to recognise and adapt to this complexity.
We believe specialist Fiduciary Management oversight will be critical, both during the period of establishment to guide pools on appropriate set up and best practice, but also on an ongoing basis. Individual independent advisers will not be able to do this on their own. Specialist Fiduciary Management Oversight services, like those provided by Isio, could be beneficial enabling Administering Authorities to be able to evaluate funds’ performance in the context of the fund’s overall objectives as well as assessing managers more narrowly – identifying any gaps and suggesting improvements. We believe this will help minimise value leakage and maximise the opportunities presented to funds through a Fiduciary Management approach.
Bring employers into the fold
In aggregate the LGPS is a huge scheme, but it is not a simple one and each constituent fund, along with each of their many employers, have their own funding and investment risk profiles which need to be considered. If the pools are going to be the LGPS funds’ investment advisers, they need to integrate their investment advice with funding and covenant advice to enable the best outcomes.
There is no LGPS without employers, despite the fact that they bear the financial risk and shield members from risk, but they barely get a mention. We would like to see more engagement with and from employers in setting up a pooling approach which is agile and finds the best balance of funding and investment risks.
Smarter local investment
Generating more pension investment into local economies is welcome, especially into local and regional government. A small proportion of the LGPS’s assets can make a big difference.
In many cases this can be achieved by individual funds and the introduction of the pools will add cost and delays. However, with current funding positions as they are, an even more straightforward way would be to reduce employer contribution rates, allowing Councils and other anchor institutions to use this cash to invest in these opportunities directly, reducing costs and delays. The LGPS has the significant surplus assets required to enable this.
Fit for a new future
The government has not recognised how well funded the LGPS is. The reference to “fully funded” is an understatement and there is therefore a risk that pooling is not fit for the new future. For example, lower or more negative cashflows will change investment requirements and funds and their employers are more likely to pursue lower risk investment strategies. In addition, there may well be a significant increase in insurance activity in the LGPS which raises big and unaddressed questions about how who advises and who implements.
Get in touch
If you’d like to hear more about our views and how they might affect you, or if you like assistance with your consultation response, please get in touch with Steve, Andrew or one of your usual Isio contacts.