UK chancellor lays out 'fit for the future' vision for the Local Government Pension Scheme

The UK government has launched a consultation seeking views on its plans to accelerate the pooling of Local Government Pension Scheme (LGPS) assets by March 2026, with a view to realising the chancellor's ambitions for UK investment and growth. The consultation is open for nine weeks until 16 January 2025.

LGPS administering authorities and asset pools will also need to submit proposals on how they will implement the proposals to government by 1 March 2025. 

Chancellor Rachel Reeves, in her first Mansion House speech on 14 November, made significant announcements about the next phase of asset pooling within LGPS.

'Megafunds' reform

One of the largest pension schemes in the world, the LGPS had £392 billion assets as at March 2024. The chancellor's ambition is to reform the existing eight LGPS asset pools – so-called "'megafunds" – boost local investment and strengthen governance requirements in these pools.

The announcements build upon the previous government's creation of the LGPS pools from 2016 and their accelerated "next steps on investment" agenda in the summer of 2023 to encourage administering authorities to pool their assets in the eight megafunds by 31 March 2025. The aim is to obtain greater economies of scale through pooling and to unlock more investment for UK infrastructure projects and local businesses.

Currently, the 86 administering authorities manage LGPS fund assets through the eight asset pools, which each adopt a variety of approaches. Less than 50% of LGPS fund assets are managed by the eight asset pools.

Investment review and consultations

The government last week published its interim report of the Pensions Investment Review alongside its LGPS "fit for the future" consultation. The chancellor launched the review earlier in July.

In parallel, the government has also published a consultation on unlocking the UK pensions market for growth with proposed reforms to accelerate consolidation in defined contribution (DC) pension scheme funds,

The new proposals will form part of the government's upcoming Pension Schemes Bill, announced in the King's Speech in July. The Pension Schemes Bill is expected to be introduced during 2025, once the consultation process has been completed.

Proposed changes

Transfer of all assets to pools by March 2026

The government's objective is now for all relevant LGPS assets to be transferred to the asset pools by March 2026.

Delegation of investment strategy

Administering authorities will be required to delegate their investment strategies to the asset pools and to take their principal advice on their investment strategy from the pool.

Pools to be FCA-regulated investment management companies

All pools will now need to be investment management companies regulated by the Financial Conduct Authority (FCA). At the moment, three of the eight pools are not FCA regulated.

New local investment strategy

Administering authorities will be required to set out a strategy for their local investment approach. This investment strategy will include a target range for allocation with regard to local growth plans and priorities and local investment reporting requirements.

Administering authorities will be required to work with local authorities, combined authorities, mayoral combined authorities, combined county authorities and the Greater London Authority to identify local investment opportunities.

Pools would be required to develop the capability to conduct suitable due diligence on local investment opportunities and make the final decision (on behalf of their LGPS funds) on whether to invest.

There is no reference in the "fit for the future" consultation to previous proposals to require funds to set a plan to invest up to 5% in "levelling up" the UK or to require funds to meet an ambition of 10% in private equity investments. Those proposals were a feature of the previous government's "next steps" agenda.

Enhanced governance, a new senior LGPS officer and an independent pensions committee adviser

The government also intends to implement the 2021 Good Governance Review conducted by the Scheme Advisory Board (SAB). This will require the upskilling of pensions committee members and the administering authorities to publish a governance and training strategy and an administration strategy,

Other measures include the appointment of a new senior LGPS officer and biennial reviews to consider whether administering authorities are fully equipped to fulfil their responsibilities.

As part of its plan to bring professional and independent expertise to pensions committees and improve governance, the government is considering requiring pension committees to appoint an independent person who is a pensions professional (whether as a voting member or as an adviser).

There will also be changes to the composition of pool boards to include representatives of their shareholders and to improve transparency.

Reform timeframe

The government has set an indicative timescale of March 2026 to implement its reforms. This builds upon a non-legally binding target set by the previous government for administering authorities to pool their assets by March 2025 or to explain why they had not done so (referred to as "comply or explain"). The new proposals go further, with the government looking for all LGPS assets to be pooled by March 2026. Given that it has taken eight years for LGPS funds to pool less than 50% of their assets, the 2026 deadline to do so for the rest is ambitious.

This comes at a time when administering authorities will already be preparing for their next triennial valuations of their fund in 2025, which will assess the funding position as at 31 March 2025. Administering authorities are also continuing to grapple with the challenges of other recent developments, including the implementation of the McCloud pensions remedy, implementing pensions dashboards and the Pensions Regulator's new code of practice.

Asset pools, working with their partner administering authorities, are expected to submit a proposal, setting out how they would deliver the proposed pooling model and complete the transfer of all assets by March 2026. Proposals will need to include a view of the costs, timeline and potential barriers and solutions. The deadline for submission is 1 March 2025, providing 15 weeks for pools and administering authorities to consider how these could be delivered.

This March 2026 timeline and the 1 March 2025 proposal deadline are ambitious. Meeting these will be a considerable challenge for administering authorities and their asset pools; in particular, as the government will still be consulting during nine of the 15 weeks to 1 March 2025 that pools and administering authorities have been given to formulate their proposals. When confirmed, the proposals will form part of the upcoming Pension Schemes Bill to be introduced in 2025.

Osborne Clarke comment

Administering authorities and their asset pools will want to consider carefully the detail of the government's proposals in the consultation document and respond before the consultation closes on 16 January 2025.

They will also need to work at pace to submit a proposal by 1 March 2025, including their view of the costs, timeline and potential barriers and solutions that sets out how they will deliver the government's proposed pooling model and complete the transfer of all assets to their pools by March 2026. Pools that are already structured as FCA-regulated investment management companies may be ahead of the game here.

It appears that some of the more radical options are not being pursued at this stage, such as mandating particular investments or creating one LGPS pool – or a "mega-megafund", perhaps – for the entire LGPS. This is likely to be welcomed by administering authorities and asset pools, although the challenging and accelerated timescale may not be.

It appears that the intention is for these reforms to work within the existing fiduciary duties of administering authorities as "quasi-trustees" of their funds. Concerns were raised about the interaction between the administering authorities' fiduciary duties and the previous government's proposals for LGPS funds to target specific investments in its "next steps" review in 2023. This debate is likely to continue in relation to the local investment strategy, including questions around what this means for national public bodies that participate in the LGPS that are not local authorities.

Administering authorities will need to consider the impact of these proposals on their current investment strategy, pooling and governance arrangements, as well as what practical steps they should take now. They should seek legal and investment consultancy advice as appropriate to ensure they are able to meet the challenges of these reforms and any legislation in the future.