Mansion House Speech 2024: Implications for the LGPS 

On Thursday 14th November the Chancellor presented her Mansion House speech, which set out plans to boost growth of the UK economy. Alongside these announcements, the Government published the following documents:

• The interim report from the Pension Investment Review;
• A report analysing the trends of UK pension fund investment;
• A consultation, titled “Fit for the Future”, on Local Government Pension Scheme (LGPS) reform in England & Wales; and
• A consultation on further consolidation in the DC market.

The purpose of this paper is to summarise Item 3, and to provide Mercer’s initial views on the consultation. We are continuing to work on a fuller response as we begin to develop our formal response to the consultation, which will go into further detail on each of these points, and as such this note is intended to provide our initial high-level thoughts only.

We appreciate this is an unsettling time for many in the LGPS community and we stand ready to assist clients in any way we can.

As anticipated, the consultation focusses on three key themes: pooling, UK investment and governance. The consultation will be open for 9 weeks, with interested parties having until 16 January 2025 to respond. The consultation includes 30 questions (covering 18 separate proposals), asking respondents to confirm the extent to which they agree or disagree with the Government’s proposals. Significantly, pools (working with their partner Funds) have until 1 March 2025 to also provide a report setting out how they intend to deliver the proposed pooling model and how they plan to complete transfers of all assets, including legacy assets.

We have summarised these proposals.

1. Financial Conduct Authority

2. The term “local investment” is used to include investments local to any of a pool’s partner funds, or investments in their region. As part of the consultation the Government is inviting respondents to provide views on how to define the term.

3. Scheme Advisory Board

The consultation lays the groundwork for significant reform of the current pooling arrangements, suggesting that some pools are not well placed to deliver for the future as currently constituted. The Government’s preference is that pools instead develop in-house investment management and advisory capabilities, with a view to establishing themselves as investment managers (and thereby be authorised and regulated by the FCA). This will require significant reorganisation within some pools and may lead to further consolidation should pools and/or funds choose to merge or transfer to a different pool.

Once fully established, the expectation is that the pools would be fully responsible for the implementation of investment strategy. Further, each partner fund would be expected to take principal advice from the pools when setting its investment strategy. The consultation notes that the partner fund may retain final decisions on strategic asset allocation, however the Government’s preference would be for this also to be set by the pools. It is recognised that full advisory capability within the majority of pools would need to be developed over time, and that in the meantime, the Government expects that pools would seek to procure advice on behalf of their partner funds.

To facilitate this shift, the Government intends for all LGPS assets to be consolidated within the pools by March 2026. This would require partner funds to transfer any remaining listed assets invested outside the pool to pooled vehicles managed by their pool, and further, to transfer legacy illiquid investments to the management of their pool (noting that it would not be possible to transfer these to pooled arrangements).

The Government has reiterated its encouragement for the LGPS to increase investment into the UK, consistent with the announcement made under the previous Government. In line with the principles set out above, the Government believes the most effective way to implement local investment is via the pools. The consultation also reiterates the importance of engaging with local stakeholders to identify and prioritise opportunities which will have the greatest impact.

Under these proposals partner funds would be required to set a target allocation to local investment, which would be recorded in the investment strategy statement and the annual accounts. Importantly, the term ‘local investment’ is used to include investments local to any of a pool’s partner funds, or investments in their region. The Government has not provided a more definitive definition for local investment and has invited views from respondents in this regard.

The majority of the proposals with regard to governance of the LGPS are based on the recommendations submitted to Ministry for Housing, Communities and Local Government (MHCLG) by the SAB as part of the Good Governance Project. The proposals include the requirement for partner funds to publish a governance and training strategy (which will include details of how knowledge requirements of officers/members will be met and also include a conflicts of interest policy), publish an administration strategy, and generally improve transparency by improving access to documents such as annual reports.

Again, building on recommendations emerging from the Good Governance Project, partner funds will be required to appoint a Senior Officer who will have overall delegated responsibility for the management and administration of the partner fund. Responsibilities will include the provision of advice to pensions committees and local pensions boards; developing the fund’s strategic approach across all areas (funding, investment, administration, governance, communication and overall risk management) and ensuring statutory responsibilities/regulatory requirements are met. Alongside this, pension committees will be required to appoint an independent pensions professional (with suitable qualifications and experience) to the committee, either as an advisor or a member to support on investment strategy, governance and administration matters.

Alongside meeting the requirements set out above, partner funds will also be required to participate in an independent governance review every two years (again referenced in the Good Governance recommendations). Such reviews would be designed to provide assurance to partner funds that governance requirements are being met. Pension committees would be required to add action plans to any reports prepared and summaries would then be published by partner funds and submitted to MHCLG.

For pools, to ensure partner funds can hold the pools to account the proposals will require that partner funds are represented on the pool board. In addition, the proposals will require pools to improve transparency and reporting, including publication of performance and transaction costs and Government is seeking views on what useful data could be reported.

We welcome the Government’s recommendation that partner funds are not mandated at this stage to invest in UK assets. The requirement to set a target is in many ways a variation of the previous Government’s proposals in this area. We also warmly welcome that the SAB’s Good Governance recommendations are at long last being enacted, something that many in the industry (including Mercer) have been calling for.

While the consultation has not been explicit in mandating pool consolidation, it potentially does this by proxy by setting timescales for pool reform that are extremely challenging. A number of pools will be required to undertake a significant amount of work to meet the requirements for FCA regulation, which may have the unintended consequence of delaying further pooling and UK investment as they work through these challenges.

Whilst we recognise that we are conflicted to comment on the consultation’s recommendations with respect to investment strategy, we re-state our response to the 2023 pooling consultation, specifically that we believe it should be for partner funds to decide from whom they receive investment advice – be that from Mercer, a competitor or a pool. Further, from a good governance perspective, we would argue that independent advice, providing strong scrutiny and oversight of the investment decisions taken by pools is essential.

The expertise that pools will need to build to provide strategic investment advice (both for public and private market investments) should not be underestimated. Investment strategy for the LGPS requires careful consideration, knowledge and expertise in pension liabilities, specialist areas of advice (including derivative based risk management structure) as well as access to investment research and sophisticated investment tools, which can only be built up over time and with significant resource.

It is also difficult to see how partner funds will be able to meaningfully control ESG and responsible investment policies with less influence on implementation. Those investors wanting to be at the forefront of Responsible Investment (RI) ambitions are likely to have their ambition curtailed, as pools try to create efficiencies across fund ranges, with greater likelihood of those who are less well progressed with RI integration potentially slowing the pace of those wanting to push the envelope.

On the governance side, as referred to above, many of the proposals align with and build on recommendations from the SAB Good Governance project and should therefore not come as a surprise. We, like many others, have been waiting for the project to be progressed towards completion and we therefore welcome these developments. Whilst the timescales for ensuring compliance with the new requirements aren’t necessarily clear from the consultation (e.g. will this be aligned with the deadline for pooling?) many of our LGPS clients have already adopted a number of the Good Governance requirements or are on the path to doing so.

At a time when the administrative/governance burden on partner funds is already high (McCloud/Dashboard/General Code etc.) and with 2025 valuations just around the corner, it will be crucial for funds to (a) understand their current position and (b) establish action plans to ensure compliance once the new requirements are confirmed. We look forward to working with clients to support them on this journey.

One area not aligned with the Good Governance recommendations is the requirement to appoint an independent advisor to/member of the Committee. Such roles aren’t necessarily a new concept but with the greater focus on knowledge and understanding of committee members/officers, and with the role not just covering investment matters, for such roles to add value to governance arrangements it will be vital that those appointed also have the right level of LGPS knowledge to carry out the role (the consultation currently doesn’t refer to LGPS knowledge in this section).

Whilst individuals could be forgiven for thinking that the funding approach is unaffected by the proposals, the reality is that investment returns are a fundamental input to the funding cost, with the high-level investment strategy decisions the principal driver. Should pools be selected to provide strategic investment advice to Funds, will this become a “one size fits all” strategy across each pool with limited Fund variation in practice? Such a structure may be more “efficient” in terms of fees, but such herding introduces additional risks in the system e.g. the cost of a poor decision in terms of higher funding contributions for local authorities and other employers, is escalated many times over, due to the greater scale. This risk is increased even further where this is little scope for independent challenge. A number of partner funds also adopt different investment strategies for different employer groups as part of their risk management framework, again emphasising that “one size doesn’t fit all” and careful consideration will need to be given the practicalities in such situations. Overall, funds will need to set clear objectives and consider seeking strategic advice covering both funding and investment matters to ensure their objectives are met.

As always, when change emerges, the provision of guidance to partner funds will be key and a consistent approach adopted in many areas will help with other Government aims around transparency and reporting.

At this stage, the Fit for the Future consultation will probably lead to more questions than answers and there will remain a period of uncertainty ahead until the picture becomes clearer. There is the real risk of a disorderly and costly transition to the new arrangements, regardless of the outcome of the consultation exercise, given the tight deadlines and potential existential risk for some pools may lead to reactive decisions being taken in advance of the consultation outcome, which could lead to sub-optimal outcomes.

Rest assured that Mercer stands ready to support clients as the situation develops, offering our clients stability, strength and scale at this time of upheaval.