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When the Chancellor gave his Mansion House speech in July it was well trailed that he would be looking to UK pension funds to help boost the UK economy. With its £400bn of assets the Local Government Pensions Scheme (LGPS) was clearly in his sights. At the same time, a consultation was launched by the Department of Levelling Up, Housing and Communities on the proposals relating to LGPS investments. Ahead of the consultation closing on the 2nd October, Steve Simkins, Partner at Isio comments:

The LGPS is a pension scheme, not a sovereign wealth fund

“The LGPS needs to be effective from the bottom up (providing good outcomes for employers and members) as well as the top down (consolidation of funds and pools). The Mansion House reforms do not address the bottom-up perspective and may be at risk of undervaluing it. After all, the LGPS is a pension scheme, not a sovereign wealth fund.

Whilst it is positive that UK growth has been given attention with an emphasis on levelling-up, environmental factors have been given a back seat. This is a missed opportunity to emphasise the importance of the E in ESG.”

Pooling has a role to play but pools should be reformed first

“Achieving effectiveness and efficiencies through consolidation is to be supported, but if the LGPS pools get too big there could be diseconomies of scale. The government’s proposal to push beyond £50bn might be a step too far.

To be most effective, LGPS pools should specialise in certain asset classes and LGPS funds should be allowed to participate in each of the specialist pools to access their chosen asset classes. We agree that funds should retain control of their strategy, in particular with reference to the profile and preference of their employers, with pools providing funds with the investment options required to manage and meet the needs of each fund’s employers.

The pools should be reformed before the pooling mandate is enforced, otherwise funds will be forced to invest in pools which are later disbanded. There are also significant future governance risks in the proposed pooling structure, not least if the pools provide advice to funds. We can already see vested interests in play in current market conditions, with the existing pools’ limited provision for low risk investments being one of the barriers to enabling the LGPS to take advantage of the very significant funding improvements since March 2022.

Furthermore, consolidation in the LGPS needs to be more orderly and is not just about investments. Administration and governance should be consolidated in line with assets.”

Private equity, private credit or infrastructure?

“Encouraging more investment in private equity counters the objective to reduce costs through pooling and also limits the current opportunity for LGPS funds to move to lower risk assets which should be in greater demand given the very significant shift in markets that followed last year’s mini-Budget. At the moment the LGPS is fully funded on a low-risk basis, a position that can be protected with lower risk assets.

With the LGPS able to reduce its risk, private equity is less attractive. The focus should be on lower risk private credit and infrastructure which can also create local impact – this is where the sweet spot is. Private equity investments are often exposed to non-UK markets so if growing the UK economy is a driver, it makes more sense to direct LGPS assets towards investments which support UK people and places, in line with the levelling up approach.

Any private credit or levelling up investment should be considered in the context of a fund’s wider investment strategy and fairly assessed in relation to other investment opportunities available. Also, the requirement to increase private credit and levelling up investments should not apply to employers who want to or need to de-risk.”

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