Pooling consultation: Government threatens to force pension funds to pool assets

The government has threatened to invoke previously unused powers of intervention to ensure council pension funds transfer their assets to their pooling organisations.

Today's long-awaited consultation on the government's flagship pooling reforms of the Local Government Pension Scheme set a March 2025 deadline for LGPS funds to pool listed assets, and signals a preference for mergers between pooling organisations.

Pooling aims for each of the 86 Local Government Pension Scheme funds to transfer their assets to one of eight pooling organisations to invest on their behalf, increasing investment in infrastructure projects and achieving cost savings through economies of scale.

The consultation on the next steps for the initiative comes amid concerns about the slow pace of progress since it was launched by chancellor George Osborne in 2015.

Today’s document notes that as of March 2022, only 39% of assets have been transferred to pools, with a further 31% under pool management. It says the percentage of assets transitioned to pools ranges from under 30% at LGPS Central to over 80% at Local Pension Partnership.

The government has previously called for pools to be worth at least £50bn, but today’s document says they currently vary from £16bn to £60bn, including passively managed assets. When assets under pool management are excluded, the size of pools reduces to £2bn to £30bn.

The consultation says “in due course” all assets – including less liquid assets – should be “fully transferred to the pools,” although some transitions will need to take place over a longer time period and there could be exceptions, such as some types of local property investments.

It says once this is complete, five of the eight pools would be around £50bn or higher at current values. The remaining three pools would be worth between £25bn and £40bn.

It warns that asset transition alone will not “deliver the full benefits of pooling in the long term,” and the benefits of scale would emerge in the £50-75bn range and “may improve as far as £100bn”.

It says: “As such, we should in future look towards a smaller number of pools in the region of or in excess of £50bn in directly invested assets through merger.”

The government is proposing a 31 March 2025 deadline for the transition of all listed assets “as a minimum,” and the consultation adds: “Transition of all assets should be considered in this timeframe, especially as pooling of illiquid investments may offer the greatest opportunities for reducing savings combined with higher returns.”

The government proposes that a “detailed rationale” would needed to be provided for each asset remaining outside the pool, “including value for money considerations”.

The timetable could be set out statutory guidance about funds’ investment strategy statements.

And the consultation warns that ministers could invoke previously unused powers to intervention to compel funds to act.

It says: “Where funds do not comply with guidance, government will consider whether a direction is appropriate. Examples of activities which could result in this include: withdrawing pool membership, failing to transition assets in line with the timetable or failing to provide adequate justification for non-pooled assets.”

The government says it “does not propose any change to the responsibility of funds for setting investment strategies,” but sets out plans to strengthen the existing guidance on funds delegating manager selection and strategy implementation to pools.

It says investment strategies should mean “a broad instruction regarding asset classes and level of risk. It should not include an excessive number of classes, or choice of specific assets”.

The documents adds that inter-pool competition is not a “desirable progression”.

It also raises concerns that members of pension committees do not have enough expertise, and proposes that each administering authority sets a training policy for committee members.

The consultation also proposes to increase transparency about progress on pooling and assets class allocations, introducing “a single standard set of data on investments across annual reports and LGPS statistic”.

In addition, the consultation confirms plans set out in last year’s levelling up white paper for LGPS funds “to have a plan to invest up to 5% of assets to support levelling up in the UK”.

It also sets out an ambition for the LGPS to allocate 10% of its assets to private equity “as part of a diversified but ambitious portfolio”.

It says each fund will “need to make its own investment decisions based on potential risk and reward appetite,” and should complete its consideration of private equity opportunities “as part of the regular review of their investment strategy statement”.

The consultation will close on 2 October, 2023.