Last week was a big week for UK pensions, not least the Local Government Pension Scheme (LGPS). Following Chancellor Jeremy Hunt’s much-anticipated Mansion House speech, the Department for Levelling Up, Housing and Communities launched a major consultation focussing on three main areas: advancing asset pooling, levelling up, and investing in private equity.

There’s a great deal of work to be done, but the Government’s hope is that the proposals will drive greater value for money on LGPS investments, as well as unlocking new investment in the UK economy. But what exactly has been announced? And what do funds need to do now?

Asset Pooling and the LGPS

Firstly, the government wants to see pooling move further and faster. It is proposing that all listed assets should be pooled by March 2025, as well as there being fewer, larger pools. In addition, there will be a short-to-medium-term focus on greater pool collaboration and investment specialisation, particularly in private markets.

LGPS funds will need to transfer all listed assets to the pool by 31 March 2025 (i.e. by the start of the next triennial valuation cycle), and include details of pooling progress and plans in their Investment Strategy Statements (ISS) and annual reports. They will also need to create an investment-related training policy.

LGPS Investments and Levelling Up

In its Levelling Up White Paper (LUWP), the Government set out its ambition for LGPS funds to invest in projects that aim to tackle the uneven distribution of opportunity in the UK.

Proposals in the consultation build upon this, suggesting that funds set a plan to invest up to 5% of assets in levelling up in the UK. Funds need to produce a timeline to implementation, which will be reported against annual reports.

The consultation provides further clarity on the definition of a ‘levelling up’ investment, identifying 12 medium-term levelling up missions: living standards, research and development, transport, digital connectivity, education, skills, health, well-being, pride in place, housing, crime and local leadership.

Investment Opportunities in Private Equity

For the LGPS, the Government’s ambition is to see broadly a doubling of the current allocation into private equity – targeting a 10% allocation to these investments. Interestingly, there is no explicit stipulation that these investments must be UK-based, although significant inference to this is ultimately made throughout the consultation.

From an implementation perspective, the Government is encouraging funds and pools to collaborate with the British Business Bank (BBB), citing the BBB's extensive expertise and capabilities in venture capital and growth equity.

Next steps for funds

There is much to digest in this far-reaching consultation, but where do funds begin?

For anyone struggling to make sense of their responsibilities, the first and most important step is identifying where you currently stand in regard to pooling, levelling up and private equity investment and responding to the consultation which closes on 2nd October 2023.

In the context of pooling, this means having a clear sense of the assets which are already pooled versus those that are not. The Government knows that the process won’t be easy, so funds won’t be penalised if liquid investments (as a first step) are not fully pooled by the 31st March 2025 deadline. However, they will need to provide legitimate evidence and justification as to why they are not.

Establishing an open dialogue with consultants and pools will be crucial to helping funds get a realistic view of what’s available to meet and how far they are likely to get by 2025.

In terms of levelling up, as a first step funds should familiarise themselves with the Government’s guidance on what constitutes a levelling up asset. From there they can work with their consultants to determine what percentage of levelling up assets they already own, the level of ambition they want in local investments and therefore what adjustments are needed to get their allocation to 5%.

The same goes for private equity. Once funds have reviewed their current allocation and their appetite for risk and return (given funds are turning increasingly cashflow negative and looking to reduce risk), the work can begin with consultants to set out future ambitions to reach 10% if appropriate to do so.

Complying with the proposed changes might seem like a daunting prospect, but for many funds significant work has already been done in these areas. For now, the LGPS community will be galvanised to respond to this consultation, with the aim of ensuring regulatory changes clearly align with the ultimate interests of the Scheme’s 6.4 million members.

Tom Pilcher is director in Redington's Investment Consulting team.