Local Government Pension Fund shake up: As college pensions fall under LGPS, how will the new Pension Megafunds be invested?

Earlier this week at the AoC annual conference, Skills Minister, Jacqui Smith announced that FE Colleges will be included in the Local Government Pension Scheme Guarantee. Literally a day later, Chancellor Rachel Reeves announces new reforms to Pensions. Particularly Local Government Pension Schemes, with a new Pension Schemes Bill.

Pension Megafunds similar to Australia and Canada

The new Pension megafunds mirror set-ups in Australia and Canada, where pension funds take advantage of size to invest in assets that have higher growth potential, which could deliver around £80 billion of investment in exciting new businesses and critical infrastructure while boosting defined contribution savers’ pension pots. 

Rachel Reeves will use her first Mansion House speech as Chancellor to announce bold action to tackle the fragmented pensions landscape, deliver investment and drive economic growth.

The radical reforms, which will be introduced through a new Pension Schemes Bill next year, will create megafunds through consolidating defined contribution schemes and pooling assets from the 86 separate Local Government Pension Scheme authorities.  

Pension megafunds will be created as part of the biggest set of pension reforms in decades, unlocking billions of pounds of investment in exciting new businesses and infrastructure and local projects.   

After her inaugural Budget that fixed the foundations to deliver stability, Rachel Reeves will use her first Mansion House speech as Chancellor to announce bold action to tackle the fragmented pensions landscape, deliver investment and drive economic growth – which is the only way to make people better off.  

The radical reforms, which will be introduced through a new Pension Schemes Bill next year, will create megafunds through consolidating defined contribution schemes and pooling assets from the 86 separate Local Government Pension Scheme authorities.  

Chancellor of the Exchequer Rachel Reeves said:   

“Last month’s Budget fixed the foundations to restore economic stability and put our public services on a firmer footing. Now we’re going for growth.   

“That starts with the biggest set of reforms to the pensions market in decades to unlock tens of billions of pounds of investment in business and infrastructure, boost people’s savings in retirement and drive economic growth so we can make every part of Britian better off.”  

Deputy Prime Minister Angela Rayner said:  

“We’ve all seen the fantastic work carried out day in, day out, by our frontline workers and it’s about time their pension started working just as hard by driving investment in their communities. 

“This is about harnessing the untapped potential of the pensions belonging to millions of people, and using it as a force for good in boosting our economy.” 

Pensions Minister Emma Reynolds said:  

“Harnessing the power of this multi-billion-pound industry is a win-win, benefiting future pensioners, and our wider economy.  

“These reforms could unlock £80 billion of investment into exciting new businesses and critical infrastructure.” 

The UK pension system is one of the largest in the world – with the Local Government Pension Scheme and Defined Contribution market set to manage £1.3 trillion in assets by the end of the decade. However, our pension landscape is fragmented and lacks the size needed to invest in exciting new businesses or expensive projects like infrastructure.  

The Government’s analysis – published today in the interim report of the Pensions Investment Review at Mansion House – shows that pension funds begin to return much greater productive investment levels once the size of assets they manage reaches between £25-50 billion. At this point they are better placed to invest in a wider range of assets, such as exciting new businesses and expensive infrastructure projects. Even larger pensions funds of greater than £50 billion in assets can harness further benefits including the ability to invest directly in large scale projects such as infrastructure at lower cost.  

This is supported by evidence from Canada and Australia. Canada’s pension schemes invest around 4 times more in infrastructure, while Australia pension schemes invest around 3 times more in infrastructure and 10 times more in private equity, such as businesses, compared to Defined Contribution schemes in the UK. Benchmarking against domestic and international examples show how consolidation of the Local Government Pension Scheme and defined contribution schemes into megafunds could unlock around £80 billion of investment in productive investments like infrastructure and fast-growing companies.  

The Government is therefore consulting on proposals to take advantage of pension fund size and improve their governance. 

Local Government Pension Scheme

The Local Government Pension Scheme in England and Wales will manage assets worth around £500 billion by 2030. These assets are currently split across 86 different administering authorities, managing assets between £300m and £30bn, with local government officials and councillors managing each fund.  

Consolidating the assets into a handful of megafunds run by professional fund managers will allow them to invest more in assets like infrastructure, supporting economic growth and local investment on behalf of the 6.7 million public servants – most of whom are low-paid women – whose savings are managed.  

These megafunds will need to meet rigorous standards to ensure they deliver for savers, such as needing to be authorised by the Financial Conduct Authority. Governance of the Local Government Pension Scheme will also be overhauled to deliver better value from investment decisions, which independent research suggests could free up money in the long-term to support local public services. 

Local economies will be boosted by the changes as each Administering Authority will be required to specify a target for the pool’s investment in their local economy, working in partnership with Local and Mayoral Combined Authorities to identify the best opportunities to support local growth. If each Administering Authority were to set a 5% target, that would secure £20 billion of investment in local communities.  

A new independent review process will be established to ensure each of the 86 Administering Authorities is fit for purpose.   

Defined contribution schemes

Defined contribution pension schemes are set to manage £800 billion worth of assets by the end of the decade.  

There are currently around 60 different multi-employer schemes, each investing savers’ money into one or more funds. The Government will consult on setting a minimum size requirement for these funds to ensure they deliver on their investment potential.  

The Government will also consult on measures to facilitate this consolidation into megafunds, including legislating to allow fund managers to more easily move savers from underperforming schemes to ones that deliver higher returns for them. 

The interim report will be published after the Chancellor’s Mansion House speech. The final report of the Pensions Investment Review will be published in the Spring and the review will continue to take account of the need to prioritise gilt market stability, liquidity and diversity. 

Stakeholder reaction to the pension reforms: 

Andy Curran, CEO, Standard Life, part of Phoenix Group said: 

“The UK pensions system is highly fragmented compared to international peers. In other countries scale has been used to drive better outcomes for savers and boost investment and we welcome the focus on how similar changes could be applied here in the UK. Today’s announcement also signals the ongoing importance of introducing  a pension value for money framework to ensure  savers can assess whether their hard earned savings are delivering for them.” 

Barry O’Dwyer, Group Chief Executive, Royal London said: 

“With £66bn of funds under management, Royal London’s Governed Range is an example of the type of pension megafund that can and does invest across a wide range of assets, including those that are not readily available to retail investors.  These reforms will allow pension savers access to a more diversified range of investments and will help the industry to move customers from older, poorer performing products.” 

Chris Rule, CEO, Local Pensions Partnership Investments said: 

“The LGPS has the potential to deliver even greater benefit to over 21,100 employers and 6.7m members. Pooling has delivered early successes. However, there is more we can do, and the Pensions Review provides the opportunity to build upon success to date and accelerate progress.   

“Since the launch of the review government has been proactive and very broad in its engagement and we look forward to continued dialogue.  We will work with our partner funds and wider sector colleagues to better understand the details of the consultation.  By leaning on the experiences of operating our model, we believe there is an opportunity for greater collaboration with our LGPS colleagues across pools and funds.  

“We welcome this latest government consultation on the evolution of the LGPS.  Over the last eight years, we have been working with our clients to deliver strategic asset allocation advice and investment implementation to enable them to pay the pensions of their members. Through a combination of internal investment management, increased scale and the development of our private markets platform, we have supported our clients in also driving down fees, with net costs savings now in excess of £200m since inception.” 

Zoe Alexander, Director of Policy and Advocacy at the PLSA, said: 

“The UK pension system is the most sophisticated and mature in the world and our schemes play an essential role in supporting the UK economy. Today’s reform proposals are a positive step towards ensuring our system delivers the best value for money for savers. 

“Larger pension schemes can help achieve better outcomes for savers through economies of scale, stronger governance, negotiating power and additional resources. We support consolidation where it is in the interests of members and represents value for money. 

“These are a positive set of ambitions from the government and for the sector. We look forward to working through the details of the proposals so that they work for savers and schemes.” 

Rachel Elwell, CEO, Border to Coast said: 

“We welcome the extensive consultation Ministers and officials have conducted as part of the Pensions Review.  The LGPS supports over 6 million hard working members of Local Government, and I strongly believe that partnership and good governance are key foundations to it continuing to operate sustainably and successfully for many more years to come. 

“At Border to Coast, our focus is on our role in supporting our Partner Funds to deliver for those members, local employers and local taxpayers.  Working in partnership, we have together already delivered more than £12bn of investments in the UK, and we look forward to working with policymakers, other national bodies and the industry to create further investible opportunities in the UK for the LGPS and other asset owners.” 

Laura Chappell, CEO, Brunel Pensions Partnership said: 

“Pooling has already delivered shared benefits for our pool partners across diversification, UK local investment, responsible investment, and economies of scale, and so we welcome this evolution of the next stage in pooling. This review goes further in aligning our shared interests with our partner funds and we are looking forward to the exciting opportunities this might bring to the Partnership, while investing for a world worth living in.” 

Dean Bowden, CEO, London Collective Investment Vehicle said: 

“The engagement for this review across all parts of the LGPS community has been very welcome and ensured that all parties have had a voice in the outcomes that have been delivered. We welcome the clarity this review now provides LGPS and we believe the timeframes set out will provide a smooth path for implementation of pooling. 

“Building on our work in London over the past decade our recent strategic thinking has seen us evolve as a more collegiate London LGPS community, with London CIV offering the services that align to the review requirements. Given expectations in terms of local investment and pools working more closely together, our existing partnership with LPPI through The London Fund provides a tangible example of success in both areas, which we can now build upon. 

“We also welcome the Good Governance Review for both pools and funds, as this will allow for better decision-making process and ensures we carry out our fiduciary duties in the best interest of person fund members .” 

Richard Law-Deeks, CEO, LGPS Central said: 

“LGPS Central Ltd is driving effective pooling and delivering substantial, cost-efficient benefits to our Partner Funds across the Midlands in areas including internal investment management, private markets, and responsible investing. We welcome this consultation and look forward to ongoing engagement with the government, our Partner Funds, and fellow pools as we advance into the next phase of pooling.” 

Commenting on plans for pension fund reforms set to be announced in the Chancellor Rachel Reeves’ Mansion House speech tomorrow, TUC General Secretary Paul Nowak said:

“These proposals have the potential to boost workers’ pensions and encourage the extra investment we need across the country. With the right safeguards this could be a win-win, funding jobs, housing and infrastructure today, and retirement incomes tomorrow.

“Trade unions will work with ministers to make sure that workers’ savings are used in their best interests. Retirement security must be first and foremost, but working people also benefit when their pension savings help to create jobs and upgrade infrastructure where they live.

“It’s encouraging that the Chancellor is looking to Australia and Canada, where the best-performing pension funds combine scale with strong member oversight from trade union representatives.”