LGPS policy: is it about more than just the numbers?

What does a new government mean for pensions, especially the LGPS, both now and in the future?

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The 2024 General Election has come and gone, and we have a new government in place. So what, if anything has changed so far for pensions, and in particular for the Local Government Pension Scheme (LGPS)? 

We explore some of those changes as well as covering what others we might still expect to see.

A Pension Schemes Bill and Minister

During the King’s Speech, a Pension Schemes Bill was announced which covered a variety of pensions hot topics. Much of this was not directly related to the LGPS, but our wider pensions industry blogs provide more information: Reaction to the King's Speech 2024 and Pension priorities and potential reforms. 

The LGPS didn’t get a mention in the Pension Schemes Bill and thankfully did not appear in the National Wealth Fund Bill. So, what is happening for the LGPS? 

A new LGPS Minister 

Our new Minister, Jim McMahon MP, has a history in local government from 2003 until 2017 as a Councillor and leader of Oldham MBC. I remember his time as Labour group leader at Local Government Association (LGA) and he was also Shadow Minister for the Department of Levelling Up, Housing and Communities (DLUHC). 

It will be interesting to see if that history results in a level of understanding of and commitment to the LGPS by government which, with some notable exceptions, has been sorely lacking over recent times. 

Pension summit at on LGPS 

On Monday 22 July 2024, Chancellor Rachel Reeves convened a meeting at Number 10 Downing Street with key figures from the pensions industry, to discuss the government’s plans for leveraging pension scheme assets to foster growth. Those invited included representatives from the LGPS and, according to the government press release, the review: 

• Explored how to unlock the £360 billion investment potential of the Local Government Pension Scheme (LGPS) in England and Wales.
• Considered further and faster pooling of assets to enhance UK investments and the potential of mandating this if progress is lacking by March 2025.
• Examined consolidation to reduce the £2 billion spent annually on fees across 87 funds (an increase in fees of 70% since 2017).

The full message in the press release can be found here, and includes a few references and numbers which bear further scrutiny in terms of trying to divine the policy direction for the LGPS.

Analysing LGPS costs: The 2bn figure explained

The release quotes £2bn in fees and costs for the LGPS in England and Wales, stating an increase of 70% since 2017. As a large absolute number and increase, it’s understandable that the government may want to take action and potentially legislate for change.

Let’s break those numbers down, firstly the £2bn. Both the Scheme Advisory Board’s (SAB) 2023 Annual Scheme Report and MHCLG’s 2022-23 SF3 returns show numbers to back up that claim, (£1.996bn and £2.048bn respectively).

Total costs

How big is £2bn in relation to a £360bn pension scheme? In total, those costs represent a little under 56 basis points of the assets - how does that compare with other large pension schemes?

The Ontario Teachers Pension Plan (OTP) reported total costs in 2023 of $1.375bn (Canadian dollars) against total assets of $247bn, which equates to a little under 56 basis points. There will of course be other schemes with costs significantly lower or higher, but ultimately 56 basis points is not usual. 

The increase

Where does the 70% increase come from? That’s a harder question. The increase in total costs between 2017 and 2023 according to SAB and SF3 is £930m and £1.013bn respectively, or 87% and 98% respectively. On the face of it, this looks even worse than the 70% quoted.

Most of the costs, around £1.8bn, are against the investment activities of the scheme. SAB show an increase in these costs of 97% between 2017 and 2023 while SF3 shows 104%. There are some caveats around LGPS funds not included in the start or end figure of each, but the magnitude is about right.

Investment costs

Has the LGPS really doubled the fees it pays Investment Managers over the last six years? If so and given that pooling has already started, it seems strange for the government to be insist that the solution is more pooling. A significant part of the answer lies in the SAB’s efforts to shed light on ‘hidden’ investment costs in the LGPS through its Code of Transparency.

The 2017 numbers in the main consist of above the line management fees while the 2023 numbers include the transaction and other costs which are ‘netted off’ against investment returns. 

When I was on the SAB, there was always concern that the success of the Code would be misinterpreted, with someone claiming that transparent reporting equals significant cost increases. Sadly, it seems that someone is the government. 

If 2023 is compared with 2017, on a management fees basis, the increase drops to 49% instead of doubling. Whilst this is still significant, there are two other things to consider:

• Assets have risen by almost £100bn or 39% (SF3) in that period, therefore the increase in investment fees and costs measured in basis points, is more like 11%.
• During that period the LGPS, encouraged by government has significantly increased allocations to more expensive alternative asset classes such as infrastructure, private equity and private debt which in 2023 made up 15% of the asset allocation compared to less than 4% in 2017.

Administration and governance costs have increased but in 2023 made up less than £300m of the £2bn total, (about £43 per member). This in a period where membership increased from 5.6m to 6.5m, alongside growing compliance and reporting requirements and, of course, the costs of the McCloud judgment. In comparison, Ontario Teachers’ Pension (OTP) reported $238 per member (approx £136) in 2023 while nearer home the Universities Superannuation Scheme (USS) reported £79 per member in the same year.

Is it about costs or size? 

Efficiencies can always be made, and costs can always be better managed but are costs really going to be the main driver of LGPS policy under this government? I would say no, and other statements in the press release to point to a driver of consolidation into fewer and bigger pools of assets which invest more in the UK.  

Since the press release, a further clarification of the government’s thoughts has emerged in the news (6 August 2024) that the Chancellor is to: ‘meet bosses of big pension schemes in Toronto on Wednesday, as she seeks to create a “Canadian-style” model in the UK with massive retirement funds investing in equities and infrastructure.’

This government appears to be thinking big and of course has the right to set its own political and financial objectives, in this case to foster increased growth in the UK. So if such objectives are to be successfully applied to the LGPS, how might this happen and what questions would it raise?

Will there be more pooling of assets?

The government’s response to its consultation on pooling guidance stated that it wanted to see either the transition of assets to pools by March 2025, or a detailed rationale for each asset remaining outside the pool including value for money considerations. The press release stated: ‘the government will consider legislating to mandate pooling if insufficient progress is made by March 2025.’

According to that same document, 70% of LGPS assets are either pooled or under pool management. So the LGPS is, seemingly, convinced of the benefits of pooling, at least in principle and in respect of most asset classes and investment opportunities. 

However, the government response accepted that some asset classes would be more difficult than others to pool. So what number is government looking for, if not by 2025, then as an indication that pooling is necessary to meet its objectives?

At a recent conference I posed the question, to a panel of LGPS experts I was chairing: “What percentage of assets will end up being pooled?”. A member of the panel came up with 82.5% which the audience also felt was about right.

Maybe it was the challenge of the difficult-to-pool assets, or the feeling that insisting on the last 5, 10 or 15% of assets of funds being pooled might not actually be worth the effort. More importantly, it could be the government's broader goals might be better supported if LGPS funds were allowed to continue investing directly in smaller, local projects to boost growth in their areas.

Should the LGPS have fewer administering authorities? 

The government seems to attribute the 70% increase primarily on the myriad of administering authorities. Is 86 administering authorities too many? Could value and services to members be improved by having fewer?

On that latter point, it was encouraging to see the reference to scheme members in the press release. While investment returns and cost have no direct impact on the amount or the level of security of member benefits, we hope that the interests of those members remain the focus of any drive for consolidation.

86 is the number that we have, so in that sense it could be the right number given that the LGPS is a successful and well-funded scheme. However, is that number ultimately where a sustainable LGPS needs to be when faced with greater demands and fewer resources? 

If a merger has benefits why do funds not voluntarily merge now? This could be down to a natural inclination to preserve the status quo but I suspect it is more due to the nature of merger as set out in the regulations - one fund gets bigger and the other disappears, takeover not merger. 

But it doesn’t have to be this way. For example, some innovative thinking and flexibility from ministers could see the emergence of true mergers in the form of single purpose combined authorities, which could enable multiple funds to come together in a structure which suits them. Such single purpose bodies could also significantly reduce the ‘conflict of interests’ challenge faced by existing multi-purpose administering authorities with competing functions and priorities.

Allowing voluntary merged structures may well go some way to achieve the government’s desired results without the need for mandation. 

The golden thread of accountability

Finally, I would ask that any move to fewer funds, whether voluntary, mandatory and whatever the structures used, finds a way to maintain the golden thread of accountability to scheme members, scheme employers and the taxpayer who ultimately stands behind the scheme. 

Effective representation for these stakeholders, including scheme members, employers and councillors representing taxpayers, would be a crucial element to delivering a successful and sustainable LGPS which can meet the government’s objectives.