LGPS Current Issues | March 2025
Investment updates
Fit for the Future Consultation
On Thursday 14th November the Chancellor presented her Mansion House speech, which set out plans to boost growth of the UK economy. Alongside these announcements, the government published a consultation, titled Fit for the Future, on Local Government Pension Scheme (LGPS) reform in England & Wales.
The consultation set out proposals and sought view in three main areas and confirmed the Government’s intent for all LGPS assets to be pooled by 31 March 2026:
Alongside over 200 other stakeholders in the sector, in January 2025 we submitted our response to the consultation to MHCLG and this can be found here. Our response was prepared following discussions both internally and externally with clients and other LGPS stakeholders, to ensure that we were able to consider all perspectives where relevant.
We appreciate this continues to be an unsettling time for many in the LGPS community and it remains to be seen how the landscape will evolve over 2025 once the government’s response to the consultation is published. We stand ready to assist clients, and other stakeholders in the sector, in any way we can. In particular, whilst the proposals set out recommendations that would strengthen the governance arrangements of Funds (building on those that first emerged from the SAB’s Good Governance project in 2021), the focus on the governance of the Pools was somewhat limited and further comment in this area is now awaited.
Please contact your usual Mercer consultant if you would like further details of how we can support here, or around the expected outcomes from the consultation more generally.
Updated opinion on the fiduciary duty
As part of submitting their own response to the consultation (which can be found here), the Board requested an updated KC opinion from Nigel Giffin KC on fiduciary duty, thereby reviewing and updating the opinion previously provided in 2014.
The opinion reviews the legal framework governing LGPS Investments referencing the Investment Regulations and pertinent case law. The updated opinon can be found here and the Board’s Secretariat is now considering whether further advice on specific points is required to support Funds going forwards.
Key points to note were:
- In relation to fiduciary duties, it emphasised the necessity to balance financial performance with the interests of scheme members. Authorities must act prudently and in good faith, ensuring that investment decisions are made with the primary goal of securing the best financial outcomes for the fund while also considering the values and preferences of the members.
- It referenced the Palestine Solidarity Campaign vs the Secretary of State for Housing, which underscores the legal boundaries within which authorities must operate when considering non-financial factors.
- It stresses that while ESG considerations are permissible they must not lead to significant financial detriment to the Fund. Authorities are encouraged to ensure that any non-financial considerations are supported by reasonable member consensus.
- It emphasised the need to engage with scheme members and employers during the reform process and consult where necessary to seek input on investment strategies, especially when non-financial factors are involved. Engagement fosters transparency ultimately.
Key LGPS Investment themes for 2025
Alongside the reform to emerge from the Fit for the Future consultation, two other key areas for Funds to be considering over 2025 will be Strategy and Sustainability.
Investment Strategy Reviews
Current market dynamics mean there is as strong rationale for perhaps accelerating any reviews of investment strategy in tandem with the valuation process to ensure they can be reflected in any contribution modelling undertaken by the Actuary key areas of focus around investment strategy setting should involve. As part of any strategy reviews, alongside being aligned with overall funding objectives we would be recommending consideration is given to:
- stress testing the return assumptions (in particular the Equity Risk Premium) and considering how this can impact portfolios and asset mix;
- use of private markets, as a way of diversifying risk and providing protection against inflation / downside shocks, and use of private debt strategies where there is a liquidity budget;
- diversifying into areas that have perhaps underperformed in recent years or less concentrated portfolios;
- reviewing investment grade credit allocations and drawing from the full spectrum of fixed interest opportunities to tailor portfolios to your needs;
- ensuring performance monitoring provides sufficient context and attribution and aligns to strategic objectives;
- Where relevant, revisiting collateral adequacy and liquidity waterfalls.
Sustainability – Mansion House
The Chancellor’s Mansion House speech in November set out the government’s aim to “deliver the foundations of a world leading sustainable finance framework to drive investment in the green transition and deliver economic growth”.
Measures to achieve this a referenced in the speech included:
- A consultation (that concluded) in February 2025 on whether the UK should have its own Green Taxonomy for investments;
- A consultation expected during the half of 2025 on how best to take forward the manifesto commitment on climate transition plans;
- Publication of draft legislation to bring ESG ratings providers into regulation;
- Co-launching the Transition Finance Council with the City of London Corporation;
- Emphasised the transition to net zero in the government’s economic strategy within the remit of the Bank of England’s Monetary Policy Committee;
- Launching a set of integrity principles for voluntary carbon and nature markets (please see our paper for further details).
For LGPS Funds investing in gilts, they will need to balance the materiality of other financial risks (such as interest rate and inflation exposure) against the risk of the UK Government not meeting its Net Zero commitments.
More generally, despite high profile withdrawals from NZAM and NZBA, many funds and pools within the LGPS continue to push forward with integrating Sustainability and Impact investment. Many Funds will have set interim decarbonisation targets for 2025, 2030 and possibly 2040.
Approaching the first of these targets this year provides an opportunity to take stock of all your Net Zero targets and we would recommend both reviewing progress versus Net Zero targets and assessing appropriateness, alongside combining climate scenario analysis into your investment strategy reviews carried out in conjunction with the actuarial valuation, given the climate change reporting principles the actuaries will need to adhere to.
Please contact your usual Mercer consultant if you’d like to discuss your investment strategy review further and potential sustainability objectives.
Other investment news in brief
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.
Board decision on LGPS Code of Transparency data system
At the Scheme Advisory Board meeting on 25 November 2024, it was agreed to explore replacing the centrally procured data system supporting the LGPS Code of Transparency with a framework approach, together with the National LGPS Frameworks team, 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.
The Board will also be exploring additional avenues to promote compliance with the Code and the effective reporting of cost data, including via Board guidance, CIPFA guidance and potential amendments to the LGPS Investment Regulations 2016.
FRC announces successful UK stewardship code signatories
On 11 February 2025, the FRC announced the successful signatories to the UK Stewardship Code following the latest round of applications. A number of LGPS Funds, related organisations, are listed in here. the FRC’s consultation on changes to the code closed on 19 February 2025 and an updated code will come into force in 2026.