The UK Treasury intends to create eight pension megafunds akin to those seen in Australia and Canada, aiming to reduce fragmentation, increase investment in UK markets and improve pension outcomes.
Collectively, the Local Government Pension Scheme (LGPS) is the largest public sector pension scheme in the UK, investing £392 billion worldwide as of March 2024. The defined benefit scheme is managed by more than 80 funds across England and Wales, each of which is run autonomously.
The largest LGPSs in the UK, as of 31 March, are Greater Manchester (market value £31.2 billion), the West Midlands Pension Fund (£21.2 billion) and the West Yorkshire Superannuation Fund (£19.2 billion).
Combined with defined contribution (DC) initiatives in the UK, these funds are expected to manage £1.3 trillion in assets by the end of the decade, the Treasury stated. However, fragmentation means that the assets cannot be invested in large projects such as infrastructure.
In the Pensions Investment Review interim report, the Treasury outlined its plans to bring together DC schemes and the assets of 86 LGPS authorities to allow pension funds to invest in a wider range of asset classes. While this consolidation is already taking place organically across smaller DC funds, the government believes that combining larger bodies would reduce fragmentation and the average assets per default.
An example of what such a pooled fund could look like is Brightwell Pensions, which manages the £38bn BT pension scheme amongst others. Chief investment officer Wyn Francis told Global Trading: “Scale in pensions is crucial. Larger pension funds are typically better governed, have better expertise and deliver better outcomes. Scale also allows access to a broader range of investment opportunities.”
Ashish Patel, a managing director of Houlihan Lokey’s capital markets group, noted that under the new regime “investors would gain access to high-calibre growth opportunities that are often out of reach for smaller individual funds, but which could be effectively realised under a single, unified framework. Meanwhile, UK companies, particularly those in fast-developing industries, would benefit from patient domestic capital. ”
LGPS asset pooling has already proven beneficial, with the Pensions and Lifetime Savings Association (PLSA) stating in its response to the Treasury’s call for evidence earlier this year that “there have been beneficial collaborations between pools. For example GLIL (a collaboration between the Northern LGPS and LPP pools) has allowed funds to obtain the scale to obtain stakes and governance rights in direct infrastructure assets that they would not otherwise have been able to do.” The association advised that ensuring the strength of these fund and pool structures should be a Treasury priority.
However, as to the Government’s goal of increasing pension funds’ investment into the UK, the PLSA explained that “larger pension funds are likely to invest more in asset classes requiring high governance costs such as unlisted equity and infrastructure. It does not automatically follow that investment in those asset classes will be in the UK, unless the UK opportunities are either competitive or fiscally advantageous.”
Clear losers from the UK government pooling initiative are likely to be advisory firms that charge fees separately to the current 82 LGPS funds. “From our discussions with LGPS funds and asset managers, their main challenge for investing in the UK is volatility in public policy,” the largest LGPS advisory firm Hymans Roberston complained.
