The UK Pension Schemes Bill has cleared its final parliamentary stages, and is expected to receive Royal Assent, giving ministers new powers to consolidate the assets of the UK’s £400bn-plus Local Government Pension Scheme (LGPS) by law. So, what does this mean for investment decisions and alternatives?
With the Bill now in place, the government needs the LGPS fund to pool all their assets into six “megafunds”. This was technically due to be completed by 31 March 2026; however, ministers previously had no legal basis to implement that measure and, following a missed deadline, have since relaxed certain merger requirements, including those relating to Financial Conduct Authority (FCA) approval.
Investment decisions will now go to these six megafunds – or pools – which could influence the private debt managers who target these pension investors.
LGPS, one of the UK’s largest schemes with over seven million members, has 86 funds in England and Wales and 11 in Scotland.
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From 2015 to date, 86 funds in England and Wales have been grouped into eight investment areas. However, under the government’s “Fit for the Future” reforms, ministers have pushed to speed up consolidation, which requires all listed and unlisted assets to be pooled.
Ministers also rejected proposals for two pools, ACCESS and Brunel, forcing the merger into six “megafunds”. Two of these, Border to Coast and LGPS Central, are expected to exceed £100bn in assets.
However, the full consolidation of 86 funds has not been achieved despite the end-of-March deadline, as some industry figures say. Alternative Credit Investor (ACI) that this process may take another 18 months. Meanwhile, two pools, Wales Pension Partnership and Northern LGPS, have yet to receive FCA approval.
Along with the consolidation changes, the final version of the Bill significantly reduced the discretionary powers included in earlier drafts, following concerns raised in the House of Lords and the wider pensions industry. Overall, the Bill has failed to allow intervention in certain investment decisions.
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But what does the consolidation of funds into six pools mean for investment decisions? The biggest change is that investment decisions will go to the pools, while funds must take advice from them when making strategic asset allocations.
The way funds approach private equity investments will change under the new rules, as William Bourne, independent adviser to the three funds within the LGPS and founder of Linchpin Advisory, explains.
“Funds can take high risk and return high-quality targets or use a government-approved template,” he said. ACI. “The latter allows them to set scales on listed shares, for example, but not UK/non-UK or passive/active. Private credit is a separate asset class in this template.”
In addition, with the consolidation of assets, many pools may want to create their own funds instead of working with managers, the larger the pool, the greater the internal creativity.
“At the right time that’s what the government would like them to do, but in the short term most lakes don’t have the expertise to do that,” added Bourne. “From the fund’s point of view, pools need to demonstrate that they are competitive with private companies in performance and value for money terms.
“But I expect that any move to internally managed costs will take time, especially in an alternative environment.”
Many experts within the system, both funds and pools alike, have told ACI they are turning to private debt as they move away from equities, undeterred by negative reviews of the asset class sell-off in the US treasury market.
Bourne said: “Investors understand that there are opportunities where banks have withdrawn from lending to small and medium enterprises (SME). Due to the pressure to invest locally, LGPS funds are very interested in lending to local SMEs.”
