With the chancellor set to announce plans to accelerate consolidation among local government pensions, industry commentators say care should be taken to secure progress already made.
In a statement published last night, the Treasury announced plans for to merge local authority pension funds into a “handful of megafunds” to boost their capacity to invest in infrastructure and local assets.
In an interview with the Financial Times, chancellor Rachel Reeves said the government was targeting eight funds – implying that the existing pools within the Local Government Pension Scheme (LGPS) could be used to advance the consolidation agenda.
Zoe Alexander, director of policy and advocacy at the Pensions and Lifetime Savings Association (PLSA), highlighted the “substantial consolidation” already completed in the LGPS through pooling, which she said had brought “many positive results”.
She said the PLSA supported the “completion” of pooling, but warned that “care must be taken to ensure this is done in a pragmatic way that is not destructive of value nor incurs unnecessary investment losses or costs”.
Andrew Singh, head of public sector investment advisory at Isio, warned that merging LGPS funds into a few large entities “raises concerns over indirect influence on LGPS investment decisions”.
“By pooling assets into fewer, larger funds, there is a risk of shifting asset allocation decisions away from local control, potentially compromising the autonomy that has been fundamental to LGPS governance,” he said.
The government has suggested that the consolidated LGPS megafunds have a 5% target for investing in their local communities.
David Piltz, CEO of Gallagher’s benefits and HR consulting division, added: “The move towards Canadian-style pension reform - merging Britain’s local authority pension schemes into a consolidated pension fund - could drive down administrative costs and streamline operations.
“However, it's worth noting that local authority schemes provide flexibility to match unique regional needs and risk tolerances. Centralising everything under a national fund could impose a one-size-fits-all model, which may not align with the goals of all local authorities or meet the needs of all beneficiaries.
“Overall, it does present an opportunity for greater returns, but it requires careful implementation to navigate the inherent challenges in such a major structural shift. “
Simon Kew, head of market engagement at Broadstone, said LGPS megafunds “will need to deliver true consolidation” of management to achieve the impact the chancellor is aiming for.
“It is pleasing to see an emphasis on supporting local growth given the strong track record some LGPS funds have investing in their area,” he added.
Michael Moore, chief executive of the British Private Equity & Venture Capital Association, also welcomed the LGPS plans, calling the public sector system “a key source of capital for fast-growing businesses and start-ups”.
“It is also right that there should be provision to ensure that the LGPS can invest more in growing the UK’s regional economies,” he added.
However, Alistair Russell-Smith, head of the corporate advisory practice at Spence & Partners, said the LGPS should learn lessons from private sector DB schemes, particularly regarding access to surplus assets.
He explained: “Currently employers in LGPS can only access a surplus when their last employee leaves pensionable service, and even then, distribution of the surplus is at the discretion of the fund... This is no incentive for employers to participate in LGPS.
“If we’re going to look at ongoing surplus distribution in private sector DB, let’s also look at it in the LGPS. This will then give the sort of framework that will encourage charities, housing associations, universities and other institutions to participate in the LGPS, critical if the system is to thrive beyond the councils and other public sector bodies that must participate.”
Further reading
Government plots LGPS mergers in Pension Schemes Bill (14 November 2024)
Why the LGPS doesn’t need to be forced to buy UK (14 October 2024)
How to get pension schemes investing in productive assets (12 August 2024)
Chancellor’s Mansion House pension reforms will ‘unlock £75bn a year’ (10 July 2023)
