Agenda item

A report of the Interim Director of Finance was presented to provide the Members of the Pension Fund Committee with details of the Government’s recently published response to a consultation exercise: “Local Government Pension Scheme (England and Wales): Next steps on investments” which indicated the Government’s proposed direction of travel in relation to investment pooling on the Local Government Pension Scheme (LGPS).

On 22 November 2023 the Government issued its response to the consultation.  The final consultation outcome (attached at Appendix A to the submitted report), confirmed that the Government would produce guidance and/or regulations to enact most of the changes proposed in the consultation document.  The Government would progress its reform of the LGPS to accelerate and expand pooling, and to increase investment in levelling up and in private equity.

The consultation response set out a number of expectations for LGPS Funds and Pools.  The main outcomes were summarised in paragraph 9 of the document as follows:

“After having considered the responses, the government will now implement the proposals that we set out in the consultation to accelerate and expand pooling, and increase investment in levelling up and in private equity. We will:

-           set out in revised investment strategy statement guidance that funds should transfer all assets to their pool by 31 March 2025, and set out in their Investment Strategy Statements (ISS) assets which are pooled, under pool management and not pooled and the rationale, value for money and date for review if not pooled.

-           revise pooling guidance to set out a preferred model of pooling including delegation of manager selection and strategy implementation.

-           implement a requirement in guidance for administering authorities to set a training policy for pensions committee members and to report against the policy.

-           revise guidance on annual reports to include a standard asset allocation, proportion of assets pooled, a comparison between actual and strategic asset allocation, net savings from pooling and net returns for each asset class against their chosen benchmark.

-           make changes to LGPS official statistics to include a standard asset allocation and the proportion of assets pooled and the net savings of pooling.

-           amend regulations to require funds to set a plan to invest up to 5% of assets in levelling up the UK, and to report annually on progress against the plan.

-           revise ISS guidance to require funds to consider investments to meet the government’s ambition of a 10% allocation to private equity.”

The Government also confirmed that pools should seek scale and should reduce in number in the medium to long term from the current 8 to probably around 4 or 5.  This number of pools is implied in the document, through reference to a Government Actuary’s Department (GAD) projection that the LGPS in England and Wales could have assets of around £950 billion, at which point the expected pool size would be around £200 billion. The Government wishes to see greater collaboration between pools in the meantime.

Through Border to Coast, the Fund had already made significant progress towards asset pooling and so to compliance with the requirements set out in the consultation outcome.  As at 30 September 2023 55.7% of the Fund’s assets were invested through Border to Coast. The approximate split of the remaining 44.3% was detailed at paragraph 6.1 of the submitted report.

The Fund would continue to work with Border to Coast and its Partner Funds to consider whether and how the unpooled assets could be transferred to pool management when it was cost effective, and in the Fund’s best interests, to do so.

On the 10% private equity target, as at 30 September 2023 the Fund had already broadly met this, with an allocation of around 10% and an expectation that this allocation would grow in the short to medium term as more commitments already made to private equity managers were drawn.

On the 5% ‘levelling up’ target – the Fund currently invested around 1% of its assets in local investments which would fit the definition of UK ‘levelling up’ investments.  Border to Coast was currently working with its Partner Funds to develop a private markets UK Opportunities sub-fund.  Should the Fund choose to make a commitment to that sub-fund, any investment would be likely to meet the ‘levelling up’ definition.

On governance, the consultation response set out proposals to ensure pensions committee members were appropriately trained in order to carry out their role, and that this was reported on and monitored.  Paragraph 56 stated:

“We will revise guidance on annual reports and on governance to require all funds to publish formal training policies for pension committee members, to report on training undertaken, and to align expectations for pension committee members with those for local pension board members.  Given the role and responsibilities of committees, including setting the investment and funding strategies for funds, it is essential that members of committees should have the appropriate training, knowledge and skills to undertake their role.”

The Committee would be kept up to date with future developments as and when the expected guidance was produced.  In the meantime, the Fund would continue to work with Border to Coast and its other Partner Funds to ensure it could respond appropriately to Government directions whilst continuing to prioritise the fiduciary duty to stakeholders and beneficiaries.

ORDERED that the information provided was received and noted.