LGPS Current Issues | September 2024
Investment updates
Ministerial letter
On 15 May 2024, the (now former) local government minister Simon Hoare MP wrote to all Chief Executives and Section 151 Officers of LGPS administering authorities in England, asking for responses to questions relating to pooling and a desire to achieve longer-term savings and efficiencies in the sector.
Although the General Election has brought about a new government / minister (Jim McMahon MP), administering authorities were still encouraged to respond to the former Minister’s Letter. Whilst not addressed directly to Mercer, given our long-standing history of working in partnership with administering authorities and other stakeholders across all areas of the LGPS, we felt duty bound to share our thoughts also with MHCLG and a copy of our response can be found here.
Government’s Pensions Review
On 20 July 2024, the Government announced a Pensions Review as part of its mission to boost investment, increase pension pots and target waste in the pensions system in order to ultimately “boost growth and to make every part of Britain better off”.
The review will consider the benefits of further consolidation in the LGPS to “cut down on fragmentation and waste” again referring to the £2 billion each year spent on fees and costs, similar to the references set out in the former Minister’s Letter referred to above. The Government will also consider legislating to mandate pooling if insufficient progress is made by March 2025.
Roundtable discussions have already begun involving LGA representatives and we await details of how it will be taken forwards. As alluded to in our response to the Minister’s Letter, we believe there are opportunities to explore further collaboration in the sector as the landscape changes by setting clear and realistic long-term objectives, promoting innovation and aiming to raise standards.
There remains a number of challenges to achieving this and careful consideration / stakeholder input will be required across all areas. On 16 August the Terms of Reference for Phase One of the review were released, focussing on investments, and on 4 September, a 3 week call for evidence was released, with a deadline of 25 September. A meeting between SAB and pension committee chairs will also take place on 14 October (it is hoped that the Minister will also attend this meeting).
Surplus Management (Investment)
As the 2025 actuarial valuations for Funds in England and Wales are fast approaching, many funds could be in a stronger position relative to 2022, and also in surplus.
Being in surplus presents a set of unique issues to consider and from an investment perspective, the traditional thinking about setting investment and funding strategies needs to be thoroughly debated and tested.
Key to this will be establishing the Fund’s “structural surplus” which may be lower than the corresponding funding surplus determined by the Actuary. Consideration will be needed as to the assets required to be set against each of the Fund’s active, deferred and pensioner members so that these cohorts are self-reliant from a funding and investment perspective with a high degree of certainty.
The “structural surplus” then emerges as the remaining assets that are truly free to be invested in an unconstrained way whilst effectively managing overall contribution sustainability.
If you’d like further details on how we can support Funds to develop and implement an effective surplus management strategy, then please contact your usual consultant. Please also refer to the funding section for further comment. It has never been so important to ensure that your investment and funding approaches are truly joined up.
AVC Framework
In July 2024, the National LGPS Frameworks launched the AVC services framework covering both AVC provider and consultancy services and we were successful in being appointed to the consultancy framework. If you’d like to know about the services we can provide, then please refer to our recent briefing note.
National Wealth Fund
The new Chancellor of the Exchequer, Rachel Reeves MP, has announced the launch of a £7.3 billion National Wealth Fund (NWF) for the UK.
The NWF will have the overarching objective of driving the UK’s transition to a low carbon economy by catalysing private sector investment given that the public capital investment alone will be insufficient to realise the transition. The key principles of the NWF are underpinned by a stable, aligned and competitive policy environment and are as follows:
The NWF Taskforce’s recommendation is that the NWF should be a single fund with a broad mandate to invest across both sectors and the capital structure to align with changes in priorities over time. A range of products will be available, positioned towards the higher end of the risk/return spectrum. Underlying investments should be guided by a strategic investment mandate (agreed with the Government) on an unconstrained basis to target the biggest opportunities in the UK in terms of decarbonisation, specifically where funding gaps exist.
In the context of the UK public investment landscape, the Taskforce has recommended that the NWF offerings include investments in Private Equity, Concessional Debt and Price Assurance Options (e.g. Guarantees).
If you’d like to discuss the NWF further in relation to how this may impact your Fund and what opportunities it may present then please contact your usual consultant.
Other investment news in brief
Code of Transparency data system
To support the Scheme Advisory Board’s (SAB) research into the longer-term future of the data compliance system that supports compliance with the LGPS Code of Transparency, the Secretariat will be launching an early market engagement exercise to explore future iterations of the data system and estimated costs. The current system allows SAB to have oversight of compliance with the Code of Transparency and enables funds to run reports and compare costs with similar size funds.
LAPFF Recommendations for UK Climate Policy
In August, the Local Authority Pension Fund Forum (LAPFF) released a report setting out their recommendations for UK climate policy. The report highlights the need for supportive polices to address climate change and reduce risks and provides recommendations for various sectors. It highlights the need for a focus on short-term action, such as addressing methane emissions and changing consumer behaviour. It also emphasises the importance of a just transition and the potential for job creation in the transition to a low-carbon economy.