LGPS Current Issues | June 2025
Investment updates
Fit for the Future Consultation – Response
Some six months since the consultation was published and over four months since the consultation closed, the Local Government Pension Scheme (LGPS) Community at long last has some clarity on the road ahead following publication of the government’s response (“the Response”) by Ministry for Housing, Communities and Local Government (MHCLG) on 29 May 2025.
The Response confirms the government’s intention to largely push ahead with its proposals, despite notable opposition to many of the pooling recommendations.
There have been some welcome changes in response to feedback, but on the whole the majority of the investment proposals will be implemented, via a mixture of primary and secondary legislation and guidance. Notably the government will introduce ‘backstop powers’ to enable it to direct an Administering Authority (“AA”) to join a specific pool and also to direct that a governance review be undertaken with immediate effect if a fund does not comply with the legal pooling requirements once effective. In relation to the governance aspects, the Response sets out changes to only a few of the proposals based on the feedback received.
Whilst many in the industry are likely to be disappointed that the Response dismisses many of the concerns raised with regard to pooling, with the consultation period over and legislation and guidance forthcoming, we expect the majority of LGPS stakeholders to now focus on the future. The backstop powers are significant, so funds will need to act quickly. We stand ready to assist the sector as required at this critical juncture.
Our initial views on the Response can be found here and we are happy to discuss the implications further with clients as necessary to support them on their journey towards compliance with the outcome emerging. A statement from SAB on 29 May 2025 can be found here.
Pension Schemes Bill
On 5 June 2025, the Government introduced the Pension Schemes Bill 2025 in the House of Commons and published a roadmap for the implementation of the various reforms. As referenced in the Fit for the Future consultation response, the introduction of the Bill is the Government’s first step towards implementing many of these announcements and the full Bill can be found here alongside supporting explanatory notes.
Chapter 1 of the Bill relates to the LGPS specifically and includes provisions relating to:
- The use of “asset pool companies” – including comment around the roles of administering authorities, the pools, and the backstop powers that will be granted to the Secretary of State to require administering authorities to participate in a particular pool, or cease to participate in one.
- FCA authorisation – whilst the Bill states that administering authorities are required to take steps to secure FCA authorisation for their pool, it then goes on to say regulations “may" require a pool to take steps to secure FCA authorisation. We will need to await publication of the regulations for clarity on this point, although our working assumption is that the regulations will require pools to take steps to secure FCA authorisation, in line with the government's response to the Fit for the Future consultation.
- Asset management in the LGPS – setting out the roles of administering authorities and pools in setting and implementing an investment strategy (and what such strategies must contain with relation to responsible/local investments and growth/income assets), including co-operation with strategic authorities to identify and develop investment opportunities.
- Local investments – defined as investments in, or for the benefit of persons living or working in (a) the administering authority’s area, or (b) the areas of the other administering authorities participating in the same pool.
- Governance reviews – when such reviews will be undertaken, requirements for reporting outcomes to the Secretary of State, and what powers the Secretary of State will have to require an ad-hoc review to take place.
The Bill also refers to amendments to:
- The Procurement Act 2023 with regard to investment management activities undertaken by the pools and how “parent undertaking” and “turnover test” clauses will be amended to relate to non-shareholder administering authorities.
- The Public Service Pensions Act 2013 to extend the Secretary of State’s powers to include the power to make regulations about the merger of two or more LGPS funds, including compulsory merger, and to amend the Act to ensure the powers and duties set out in the Pension Schemes Bill can be exercised as scheme regulations, subject to consultation.
It’s likely there will be further changes to the Bill before it is enacted and we will be keeping a close eye on matters as it progresses through Parliament. We’ll look to discuss the relevant points with you further in the coming weeks as part of conversations around the consultation response and the implications for the Fund going forwards during this period of change. As we understand, a consultation on changes to the LGPS Regulations is expected later in the year.
For your information, I’ve attached Mercer’s technical Briefing on the Bill as a whole and associated developments. The comments above, and in the attached, are based on our non-legal interpretation of the Bill. You will need to seek your own legal advice on the content/implications of the Bill, should this be deemed necessary.
Fit for the Future Consultation – Pooling letters
Whilst a response to the main Fit for the Future consultation emerged on 29 May 2025 as referred to above, on 9 April 2025, a letter was issued by the Government to some LGPS pools (and some administering authorities) setting out the Government’s decisions in relation to the proposals submitted by pools as part of the pensions review.
The letters to those administering authorities in the Brunel and Access pools stated that their pool’s proposals did “not meet the Government’s vision for the future of the LGPS” and issued an invite to the administering authorities to consider and identify a new pool to work with going forward. Following this, a statement was issued by the Scheme Advisory Board on 11 April 2025 in response to the Government letters setting out its support for those impacted and reiterating the importance of LGPS members and employers being at the heart of considerations about what is best for Funds and their circumstances.
On 12 May 2025, following on from the statement it issued in April 2025 and an urgent meeting convened on 9 May, the Scheme Advisory Board issued a letter to both the Pensions Minister and the Local Government Minister requesting an extension to the pooling deadlines already in place given the “perfect storm” administering authorities are currently facing with McCloud, Pensions Dashboard, General Code, Local Government Reorganisation and also changes emerging from the local elections. A meeting between LGPS Committee Chairs, SAB and the Local Government Minister took place on 13 May 2025 to discuss the issues raised in the letter.
The response to the Fit for the Future consultation confirms that the government intend to proceed with 6 pools, down from the current eight.
Please contact your usual Mercer consultant if you would like further details of how we can support here, or around the outcomes from the consultation more generally.
National Framework for Transition Management Services
On 10 March 2025, the second National Framework for Transition Management Services went live. The Framework builds on the predecessor, and is designed to help LGPS Funds, Pools and wider public bodies swiftly and easily access a range of transition management services. With c£105bn of assets held outside of the pools effectively (referenced in the Fit for the Future consultation) and the future direction of travel clear, transition activity is likely to be elevated over the next few years, and securing the relevant services to manage any transitions should help Funds reduce risk and save time and money.
The framework is split into two lots, as summarised below. Mercer has been appointed to Lot 2, can assist you with your asset transitions, including determining whether services from Lot 1 Firms are required.
LOT 1:
Transition Management and Implementation Services
- Transition risk management, project management, equity and fixed income execution, FX management, and cash management, and cost reporting.
- BlackRock, Russell, Northern Trust, and Macquarie are on the framework.
LOT 2:
Transition Management Advisory Services
- Transition manager selections, strategic transition advice, establishing governance structures, cost reporting and attribution, and post-transition reviews.
- Mercer was one of 2 firms appointed to Lot 2.
Benefits of using the Framework for LGPS Funds include:
- Enable access to specialist providers whose experience and quality has been tested
- Robust and transparent process with high level of due diligence and specialist support
- Provider ceiling prices established
- Possibility to benefit from cumulative rebates
- Shortened timescales
- Reduced procurement and legal costs
- Agreed T&Cs
- Comprehensive user documentation and support from Frameworks team
For larger, more complex transitions, Mercer can assist you with the selection and oversight of specialist transition managers. Not all transition managers are equal, each have particular strengths and weaknesses. Mercer has over 20 years' experience working with transition managers. We can help interpret their detailed reports, ask the right questions, and ensure you have a smooth, cost effective and well controlled transition.
Where a Transition Manager is not required, Mercer Sentinel’s dedicated Transition Coordination team can also take full responsibility from the planning stage right through to transition completion making the whole process as efficient as possible, giving you peace of mind, easing your administrative burden and minimising disruption to your daily workload, allowing you to regain time for other tasks.
For further details of how we can support you in any transition exercises, please contact your usual Mercer consultant.
2025 Actuarial Valuations – Cohort investment strategies
The links between funding and investment strategies are well documented. As Funds in England and Wales now look to review these strategies as part of the 2025 actuarial valuation exercise, with strong funding positions (and bigger surpluses relative to 2022) expected to emerge for many Funds, this presents a set of unique opportunities to consider how these strategies might evolve going forwards.
Where surpluses do exist, the key questions to ask are “What is the true investment reserve?”, “Is this the same as the funding surplus”? Establishing the investment reserve requires determining what assets are required to prudently service the accrued liabilities and in some cases, but not always, this may be lower than the Fund’s current surplus. The investment reserve can then be free to be invested in an unconstrained way whilst effectively managing overall long-term contribution rate sustainability.
In our March edition we provided further comments about other key areas to consider when reviewing investment strategies and these can be found here.
If you’d like to explore the investment reserve concept further, then please contact your usual Mercer consultant.
Other investment news in brief
Local election results
Where local elections did take place in May (some having being postponed due to local government reorganisation), it’s possible that there will have been changes to the policitcal parties represented on pension fund commitees, and in some cases, if overall control of a council has changed, changes to the committee chair alongside this. Given the differing views of the political parties around certain investment areas, it will be important to engage early with the new commitees given the wider changes to the LGPS landscape and the requirement for Funds to be considering their investment strategy alongside the 2025 actuarial valuation in England and Wales. We are happy to support with training of the new committees where required to ensure robust decision making can take place going forwards.
AVC Reviews
At a time where much of the focus on LGPS investments is on the consultation and what will emerge in relation to pooling and local investments, Funds still have a duty to consider the performance/suitability of the AVC Funds available to members and this should not be forgotten. For many Funds, given competing pressures faced, AVC provision may not have been reviewed for a number of years. Please refer to our briefing note for further details on how we can support Funds in this area. A recording of a recent Mercer webinar setting out some of the key issues that need to be considered with regard to AVC governance can be found here.
National Framework for LGPS Code of Transparency data system
As referenced previously, the Scheme Advisory Board are to replace the centrally procured data system supporting the LGPS Code of Transparency with a framework approach, which would continue to offer basic collecting and reporting of cost templates to all Funds but allow them to procure data validation and benchmarking services alongside this in a seamless fashion. A multi Provider Framework Agreement for the Provision of Benchmarking and Cost Transparency Services was published on 24 May 2025 and is scheduled to begin on 1 April 2026 once providers have been selected.
Summary note on fiduciary duty
Following on from the updated KC opinion on fiduciary duty received from Nigel Giffin KC in January 2025 (which can be can be found here), a summary note (not drafted or endorsed by Nigel Giffin KC) was published by the Scheme Advisory Board on 16 April 2025. The note sets out the Board’s views based on their current understanding of the law and policy only.