Agenda item

A report of the Director of Finance was submitted to provide Members of the Teesside Pension Board 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).

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 was 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 wished to see greater collaboration between pools in the meantime.

Much of the detail of implementing the proposals would be set out in guidance which was expected to be released during the first half of this year.  Although there were asset allocation targets set out within the response, namely the 10% allocation to (global) private equity and the 5% allocation to UK ‘levelling up’ assets, the Government had stated these targets would (initially at least) be voluntary.

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 remaining 44.3% was split between Listed Equities, Alternatives, Direct UK Property, Indirect Property Funds and Cash.

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. 

As at 30 September 2023 the Fund had already broadly met private equity target, 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 a small proportion (under 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 in future, 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.  This was in line with the current requirement for Board members to be trained and they would be included in any training provided to Committee members.

The Board 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 respond appropriately to Government directions whilst continuing to prioritise the fiduciary duty to stakeholders and beneficiaries.

AGREED that the information provided was received and noted.