Chancellor accused of ‘mandating’ LGPS investments


7 Mar 2024

Jeremy Hunt’s desire to increase an equity weighting among the LGPS has not gone well, finds Andrew Holt.

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Jeremy Hunt’s desire to increase an equity weighting among the LGPS has not gone well, finds Andrew Holt.

Coming on the back of the recent consultation encouraging the Local Government Pension Scheme (LGPS) to invest more in private equity and Levelling Up, the chancellor yesterday confirmed a requirement for LGPS funds to report on the breakdown of their asset allocation – with the expected revised Annual Report guidance due by next month.

Adding an important proviso, Hunt also said that the government will review what further action should be taken if this doesn’t lead to UK equity allocations increasing. 

On this, Louis-Paul Hill, associate partner at Aon, said: “We would point out that LGPS funds tend to have a much higher allocation to growth assets such as equities, than their private sector counterparts, due to their long-term nature and the security both of employers and of benefits for members.” 

However, while it is true that funds’ allocation to UK equities may well be lower than government would like, and is likely to have fallen materially over time, it’s important to consider why that is the case, noted Hill.

“Funds invest in order to deliver the benefits to members cost-effectively for their employers, which means investing to generate the best risk-adjusted returns,” he said.

Putting numbers to this, Hill noted UK listed companies make up only around 4% of the total global equity market and UK equities, as measured by the FTSE-All Share index, have returned around 7% per year on average compared to 10.5% per year from the MSCI All World Index over the last 20 years – and/or an average of 5% per year compared to 13% per year over the last 10 years.

No mandating

In addition, Mary Lambe, head of LGPS governance at Aon, made a broader, and more critical point. “Reporting on the percentage allocated to UK equities won’t, of itself, change investment behaviour and from a governance perspective, nor should it,” she said. 

And she added: “We don’t believe government should be mandating how LGPS funds invest, and it is not clear how that fits with the fiduciary duty of pensions committees.”

Iain Campbell, head of LGPS investment at Hymans Robertson, also identified this as an issue.

“The new disclosure requirements for the LGPS mentioned in the budget do not come as a huge surprise, given last year’s consultation indicated a vast range of reporting requirements would be brought in for the LGPS. What has raised some eyebrows, however, is the focus on UK equities,” he said.

“This appears to be another shift in the government’s wording around the role they wish UK pension funds to play in supporting the UK economy,” he added.

“Previously, the focus has been on ‘venture and growth capital’ and ‘productive finance’, so further clarity will be needed on what exactly, will be defined as UK equities, and whether this is just one of a number of UK asset classes that will need to be reported on,” Campbell noted. 

Global investments

Campbell added further: “It was also surprising to see the government state that stricter rules may be brought in if the reporting requirements do not lead to increased investments in UK equity. Great efforts have been made to diversify investments globally, opening up a larger investment opportunity set, and any reversal of this could well create a challenge to fiduciary duty.”

There was also a mention by the chancellor for the LGPS to help with funding for building more children’s homes, which was a bit left field. “This was again somewhat of a surprise,” added Campbell.

“It can only be presumed that it ties in with the government’s Levelling Up agenda, albeit it on a somewhat more focused issue,” said Campbell. “Given the purpose of the LGPS and the fiduciary duty of pensions committees, this must be done in a way that stacks up financially for the LGPS – the risk-adjusted returns must be acceptable, and the governance requirements cannot be too burdensome,” he added. 

“We must always remember that the LGPS is there to pay benefits, not to make up government spending shortfalls,” concluded Campbell.


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