LGPS Current Issues | November 2024
Investment updates
Government’s Pensions Review – LGPS Consultation
On Thursday 14 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 the following documents:
- The interim report from the Pension Investment Review;
- A report analysing the trends of UK pension fund investment,
- A consultation, titled “Fit for the Future”, on Local Government Pension Scheme (LGPS) reform in England & Wales and,
- A consultation on further consolidation in the DC market.
As anticipated, the LGPS consultation focusses on three key themes: pooling, UK investment and governance. The consultation will be open for 9 weeks, with interested parties having until 16 January 2025 to respond.
The consultation includes 30 questions (covering 18 separate proposals) asking respondents to confirm the extent to which they agree or disagree with the Government’s proposals.
Significantly, pools (working with their partner Funds) have until 1 March 2025 to also provide a report setting out how they intend to deliver the proposed pooling model and how they plan to complete transfers of all assets, including legacy assets. The consultation did not include any proposal around the consolidation of individual LGPS Funds.
In summary, the proposals include the requirement for administering authorities to:
- fully delegate implementation of investment strategy to, and take principal investment advice from, the pools,
- transfer all legacy assets to the pools by 31 March 2026,
- set a target allocation to local investment, with input from other local bodies to agree priorities and identify opportunities,
- Keep a record of local investments in the ISS and annual accounts.
Additional governance requirements are also proposed for the pools to implement around board representation, transparency and reporting. Pools will also be regulated by the FCA.
Given the implications of the above on many Funds and stakeholders, we have provided further comment on these here. For comment on the governance proposals, please refer to this section.
For reference, a copy of our response to the Call for Evidence for Phase 1 from September can be found here. Further details around Phase 2 are expected towards the end of the year where the focus will be on broader retirement issues, and retirement adequacy in particular. Further consultations/Call for Evidence requests are expected. It’s likely that anything to emerge from Phase 2 won’t form part of the first Pensions Bill during this Parliament, but perhaps a second given the timescales.
Lobbying
In September 2024, the SAB released a statement in light of increasing levels of lobbying about how LGPS funds are invested.
The full statement can be found here, but we have highlighted the most prescient points below.
- Consideration of non-financial factors is also permitted, the amount of weight (if any) attached to such factors is at the discretion of the administering authority [“AA”]. AAs may do so, only where it would not lead to significant financial detriment and where it would have the support of the scheme beneficiaries.
- It is not appropriate for investment decisions to be driven directly by the political views of Pension Committee members or indeed Government ministers (except as where prescribed in law, e.g. under the Sanctions and Anti-Money Laundering Act 2018). The Supreme Court held, in its judgment on the Palestine Solidarity Campaign case, that it is not appropriate for political preferences, whether local or national, to take precedence over what is required under the fiduciary duty.
- To the extent that environmental, social or governance considerations are applied, these should be framed in terms of what the scheme members would support or share the concern about those considerations.
- When acting within their fiduciary duty the Administering Authority is legally obliged to limit itself to acting in the best interests of scheme members (as defined above) and the views of local residents generally on ESG matters is not relevant.
- The quasi-trustee role means that decisions made by the Pension Committee should not privilege one group of scheme members over another. This creates an obvious tension when Pension Committees know that scheme members are likely to hold strong but very different views on a particular subject. Where such disagreements are anticipated, the Pension Committee should try and keep focus on financial factors and avoid taking one position against another.
Fiduciary Duty – Counsel opinion
Linked to the above, in response to a number of letters being issued to administering authorities raising concerns about companies linked to the ongoing situation in the Middle East, that LGPS Funds invest in, the SAB sought Counsel advice on behalf of the LGPS.
In particular, SAB asked for an opinion whether Funds could face criminal action as a result of holding such investments. On 24 October 2024, the legal advice from Nigel Giffin KC was published and can be found here. Whilst the advice should help AAs respond to letters should they be received; it does not comment on the underlying investment decisions and exclusions themselves.
Dealing with the issue of exclusions is complicated and requires careful consideration, with supporting legal and investment advice. The recent SAB statement is useful and highlights the issue about how to consider and evidence scheme member views (which has its own issues in terms of how to do and assess).
We’d be happy to discuss the above two topics with administering authorities as required. Funds should still seek independent legal advice potentially before agreeing to take any particular course of action.
Other investment news in brief
Net zero investment framework (NZIF) 2.0
The NZIF 2.0, released in June 2024, is an initiative aimed at mobilising the financial sector to support the transition to a net-zero carbon economy. It provides guidance and tools for investors to align their portfolios and make informed decisions to mitigate risk and identify opportunities, all with the goal of achieving net-zero greenhouse gas emissions by 2050. It also promotes transparency and accountability and enables clients to enhance their reporting.
NZIF 2.0 is owned by the Institutional Investors Group on Climate Change (IIGCC), a collaboration of over 400 members, mainly pension funds and asset managers, over 27 countries and with over €65 trillion in assets under management. The framework recommends four objectives and targets.
Please speak to your usual Mercer consultant if you’d like more details about the Framework.
Responsible Investment Total Evaluation (RITE) – LGPS Results
RITE helps LGPS Funds assess how effectively they have integrated ESG best practices against each of Mercer’s Sustainable Investing Pathway categories: philosophy, policy, process and portfolio. The assessment scores Funds on a scale of A++ to C and allows them to track their progress over time, benchmark themselves against their peers as well as understand the priority actions to improve their score. A recent survey undertaken showed that Mercer’s LGPS Client base scores very favourably compared to our wider UK and Global client base recognising the steps taken by Fund in this area.
Further details about RITE can be found here. For details of your score or to see how you compare against your LGPS peers and to receive your specific interventions and actions, then please contact your usual consultant.
Aside, our ESG Framework for manager due diligence is being updated to reflect the evolution of the industry. We will be introducing a strategy level dashboard report intended to isolate key criteria and exposures that are consistent with client priorities. Further details will be provided in due course.
Social Impact Assessment Vehicle
As part of the budget on 30 October, the Government announced that work will begin to develop a social impact assessment vehicle. The aim of this vehicle will be to bring together socially motivated investors, the voluntary sector, and government, to tackle complex social problems. Further details of this will be announced at Phase 2 of the Spending Review. It will be designed and developed through engagement with the sector.
Stewardship Code consultation
The Financial Reporting Council (FRC) is consulting on changes to the Stewardship Code, which a number of LGPS Funds and pools are currently signatories too.
The consultation runs until 19 February 2025 with the new Code expected to be published in late 2025 and effective for reports published in 2026. Key proposals in the consultation centre around the definition of “stewardship”, reporting processes, targeted principles for different signatories and service providers, and new guidance to support effective implementation.
As a service provider, we will be preparing our own response to this consultation. Please let us know if you’d like any support with your own.