Mansion House Speech 2024 – What’s next for the LGPS?

In this note we provide, having taken time to consider the detail, further information and views on the LGPS announcements.

What was announced?

Firstly – what wasn’t announced – the possible bombshell of forced LGPS fund mergers. This had been the subject of intense speculation ahead of the speech, but ultimately did not come to fruition. This is one to watch in years to come.

Instead the focus is on the asset pools and how they operate alongside the funds. This is not a huge surprise as the Government is most focussed on using the assets for growth and achieving results as quickly as possible.

Alongside the speech, a response was issued to the rapid Pensions Investment Review consultation earlier in the Autumn and a further LGPS specific consultation called “Fit for the Future”, which closes on 16 January.

We use the term “announcements” in the context of the government’s clear intent, but also noting that they are subject to consultation.

More detail on the announcement

Asset pooling

• The intention is also that the pools will have a significantly increased role and responsibilities. This includes being the sole investment advisor to their underlying LGPS funds and having a full complement of investment offerings which would allow the LGPS funds to implement their strategy in full, including local investments.
• This represents a very big step towards a so-called Fiduciary Management (“FM”) model approach for the LGPS, a tried and tested model for trust-based pension schemes, but not without its governance challenges.

Boosting UK and local investment

• In order to boost LGPS investment into local and regional economies, funds will be required to outline their approach to local investment alongside their target allocation to UK investments in their Investment Strategy Statements.
• The funds will be required to identify suitable local investment opportunities and take them to their pool and will be required to collaborate with local government in order to do so.
• The pool will be responsible for due diligence and final investment decisions and then implementing and managing the local investments.

Governance reform

• There is a big focus on governance at both the fund level and asset pool level. The plan for funds is to utilise the recommendations from the 2021 Good Governance Review which hasn’t yet been implemented.
• Amongst other things funds will need to publish a governance and training strategy, Committee and Board members will have to demonstrate knowledge and skills and improve overall transparency.
• Funds may need to appoint an independent adviser.

The latest consultation document is detailed, consisting of 30 questions.  The level of detail would indicate intent from the Government, who are more interested in how they should implement the changes than whether they should implement them at all. Isio is going to respond to the consultation.

What is clear is that this government’s view is “bigger is better” in terms of promoting economic growth and improving productivity in the UK, which is the government’s number one aim. The announcements have been structured in an effort to yield results as quickly as possible. However, if “big” is not done well, it could lead to unintended consequences.

 The LGPS approach is described as “fragmented”, which these announcements only deal with in part. If this continues to be a concern then there may be more changes to follow, mostly likely in the form of forced mergers, to achieve efficiencies and effectiveness across all aspects of the LGPS, not just the assets.

Wider Context: Surpluses

With the March 2025 Actuarial Valuation approaching, many English and Welsh LGPS funds anticipate strong funding positions. This coincides with the introduction of new contribution rates and the launch of the “mega-pools.”

Isio’s LGPS Low-Risk Funding Index shows a current aggregate funding level of 112% as of 30 September 2024, consistently above 100%, indicating a significant surplus of around £40bn. This surplus is crucial in the context of the government’s plans.

Despite its importance, the strong funding position has been largely overlooked in consolidation discussions. However, it will significantly influence the LGPS’s future, affecting risk appetite, net cash flow, and employer choices. We advocate for integrating this strong funding position into all future discussions to better shape the services provided by pools and funds.

What This Means for LGPS Funds

Responding to the consultation will be the immediate focus for LGPS funds, requiring significant effort in a short timeframe amidst scarce resources. Prioritising impactful points, such as timescales, pool-to-fund interfaces, and maintaining local control, is crucial. Aligning with like-minded funds can enhance influence.

Funds must consider retaining sufficient control. The consultation suggests appointing an independent advisor for pooling decisions, but this may be insufficient for overseeing a large Fiduciary Manager. Specialist Fiduciary Management Oversight services, like those provided by Isio, could be beneficial.

Significant reforms and accelerated timescales may impact strategic changes or implementation decisions. However, funds should remain agile over the next sixteen months, considering current market conditions and the actuarial valuation process. Delaying decisions could result in poorer outcomes.

The announcements did not suggest exceptions to the pooling rule. Possible exceptions for funds to consider include:

• Certain local investments
• Insurance policies
• Treasury management of short-term cash requirements

Lastly, the announcements did not address Scotland or Northern Ireland, which are not currently required to pool assets. The impact on these funds remains unclear.

What This Means for the Pools

LGPS pools face significant challenges following recent government announcements. They all, including the three not yet FCA authorised, must onboard 100% of assets and establish fully functional Fiduciary Manager capabilities, including in-house management of local investments.

Consolidation of pools may occur as some might find merging a more viable option than going solo. Even well-placed pools must plan to deliver an expanded range of investment services, requiring increased budgets and resources.

Challenges from the past nine years, such as upskilling teams, competing for talent, and ensuring a comprehensive, conflict-free product range, will persist and likely intensify.

Pools must understand their funds and employers more deeply to provide excellent service and improve outcomes, especially as some funds may consider de-risking.

Three pools (ACCESS, Welsh Pensions Partnership, and the Northern Pool) need to obtain FCA permissions which will extremely challenging to achieve on time.

Specialisation by asset class and potential consolidation could drive efficiency and improve outcomes.

Implications for Employers

While the focus is on funds and pools, employers should consider the following:

• Integrated Risk Management (IRM): Investment, funding, and covenant advice should be interconnected. The Pensions Regulator’s IRM guidance is very relevant. The LGPS is getting better at IRM, but with the pools providing investment advice and being largely investment focussed there’s a risk of investment advice being detached from funding and covenant matters. Employers should expect the pools to understand them better.

• De-risking: With strong LGPS funding, many employers might prefer to de-risk, impacting funding and covenant. Pools must have the agility to  provide the low-risk assets required to by these employers avoid poor outcomes.
• Local investments: Employers could advocate for local investments from their LGPS fund as an alternative finance source. However, surpluses are essentially loans from employers to LGPS funds. Reduced contributions could serve as a more straightforward investment in local economies.
• Actuarial Valuation: With the valuation approaching, now is the time to discuss efficient LGPS funding and ensure funds and pools consider employer perspectives in their plans and government interactions.

Ideally employers would be more involved in shaping the right consolidation solution. However, the government hasn’t required or encouraged funds to discuss this with their employers and there is insufficient time for funds to do so. Employers will need to be proactive in order to get involved and have a say.

We recommend employers respond to the consultation selectively, focusing on key issues and the themes above which are not fully dealt with by the questions.

What next?

On the face of it, these proposals are not a major change in the approach taken to the LGPS; in many ways they are a continuation of the work of the previous government. However, beneath the surface they go further in ambition and are being delivered with renewed  vigour. Combined, they represent a very significant change in the overall landscape.

The consultation period will run until the 16 January – the next key deadline the LGPS community is working towards. This consultation will dictate the way the LGPS funds, asset pools, and employers operate going forwards.

As ever with these things the devil is in the detail. The method by which the proposals are implemented, and the consequences of not complying, will be key to determine the level of success (or not).