Mansion House 2024: unpacking the Government’s changes to LGPS
Local government pensions will be forced to pool more of their assets, among a raft of changes announced by Chancellor Rachel Reeves. Schroders explores the changes and their potential consequences.
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After months of speculation on the future of the Local Government Pension System (LGPS) in the UK, we now know the Government’s plan.
Ideas have been floated spanning everything from “no change” to having one single, enormous uber-fund of £400bn. Another controversial idea was that some of the assets in the LGPS might be mandated to invest into UK projects in some way.
In this note we’ll give our initial impressions on what was announced by the Chancellor in her Mansion House address last night, from the point of view of an asset manager with a long history working with the LGPS sector. We’ll also draw on the recent LGPS Investment Survey we conducted alongside Room 151 talking to people across the sector. This gives some clues to the kinds of questions and challenges Rachel Reeves, Emma Reynolds and their teams might face in the coming months as they enact their reforms.
It is worth reflecting on where we start from. A total of 95 LGPS senior executives participated in our research, from local authority funds, pools and their advisors. We think it gives an excellent temperature check on how the sector is feeling. Going into last night, only 12% of respondents felt we start from a good place, and that no change was needed to the current structure of the 86 funds and 8 pools. So, while people differ on exactly what change to make, it does seem people agreed that something needed to change.
What we now know is going to change
We need to wait for the full details, but it seems clear that the upcoming Pensions Bill will make the pooling of fund assets mandatory (and we assume that means all assets).
It also looks like responsibility for strategic asset allocation will transfer from the funds to the eight pools. This is a big change, but it looks like funds will retain an important say in how some assets are invested. The Government has said that “…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.” 5% has been used as an example of that target, which would lead to roughly £20bn of local investment from across the LGPS.
Previous “levelling up” targets have had a national focus, but 65% of respondents to our survey said that they felt that “local” should mean at least within the pool boundaries, if not more targeted than that. That said, over half of respondents flagged concerns with the financial returns of the place-based investments available on the market and the number of investable opportunities within their local area.
Beyond these targets, we suspect the absence of a legal requirement to invest in the UK will be welcomed warmly across the sector, with the proposal provoking some strong reactions.
What does all this mean?
On the one hand, these are not major structural changes. We start with 86 funds and 8 pools, and we will end these reforms with the same. But we should not underestimate the scale of these changes.
With around 45% of total assets currently pooled, under the strictest definition, moving to 100% is a big shift. Three of the current pools (WPP, ACCESS and Northern Pool) will need to seek FCA authorisation. Maybe the biggest talking point of all is the shifting responsibility for strategic asset allocation to the pools. This significantly changes the dynamics of the sector, and at least some authorities are likely to oppose this, and possibly strongly.
What may be missing from what we know so far are details around whether cross-pool investment will be permitted – or even encouraged. And on timing: 2030 is a long way off, so will there be intermediate milestones? And what needs to be done tomorrow? We may need to wait to see the actual Bill for answers.
What does it mean for asset managers like Schroders? We’ve worked with the sector in various guises for over 30 years and don’t expect that to change, even if the dynamics of procurement and the nature of partnerships in the sector evolve. And our initial take is about partnership. In this future model, LGPS pools and funds will have an even greater need for strategic partners able to meet a broad range of needs – be that classic debt and equity; or within private markets, renewable infrastructure or private equity and venture. Taking an example of just a couple of those, the Mansion House speech included an announcement that the British Business Bank has completed its £250mn investment, alongside our partner Phoenix, into a new Schroders Capital fund that will invest in private life science and tech companies in the UK (the so called “LIFTS” initiative). We think this is a great example of the kind of investments LGPS will increasingly be looking for from partners in the market as we transition to the new world…
A consultation process launched on 15 November gives the sector nine weeks provide their views on the Government’s proposals for the LGPS. The consultation will focus on three areas:
- Reforming the LGPS asset pools
- Boosting LGPS investment in their localities and regions in the UK
- Strengthening the governance of both LGPS AAs and LGPS pools
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