In the week that the eight organisations that invest billions of pounds for council pension funds have to justify their continued existence to ministers, LGC examines controversial plans to complete a decade-long transformation of the Local Government Pension Scheme.
In the long history of the Local Government Pension Scheme, 2025 may be seen as the decisive moment when power shifted away from councillors and council pension funds for good.
Although often cited as one of the world’s largest pension schemes, its £400bn is split between 87 separate pension funds. Over the last decade, successive governments have sought to consolidate this fragmented landscape to save money through economies of scale and enable bigger investments in the UK. Their chosen approach has been pooling, which sees the pension funds transfer their assets to one of eight pools which then invests them on their behalf. However, progress has varied widely between and within pools.
With a new government desperate to boost economic growth, ministers have launched a push to ‘complete’ pooling by March 2026, setting out proposals that would further reduce the role of council pension funds and greatly increase that of the pools.
With ministers currently assessing responses to their Fit for the Future consultation, and with the eight pools having until this Saturday to tell the government if and how they can meet stringent new requirements over the next 12 months, there is much at stake.
The prize is a more streamlined LGPS that drives economic growth and better investment returns; the risk is a rushed implementation of proposals that could cost councils millions of pounds in higher pension contributions.
Role of funds
Council pension funds were once the big beasts of the LGPS investment world, but after a decade of pooling their role has gradually diminished. Now, the government’s proposals would restrict their investment decisions to the broadest of strategic questions, with the pools responsible for all implementation.
Funds – or administering authorities (AAs) – would be responsible for setting their strategic investment objectives, including their approach to responsible investment and investment in their local area.
Most pools “have no experience or track record of providing asset allocation advice, nor sufficient resource to deliver it”
Bromley Pension Fund
They could also choose to set their high-level strategic asset allocation (SAA), using a government template which would let them say what proportion of the fund they wanted invested in nine broad asset classes, such as equities, infrastructure and UK government bonds. However, the government would prefer them to delegate this to the pool.
Pools would be responsible for all implementation of these strategic decisions, from tactical asset allocation and choosing investment managers to making individual investment decisions.
Decisions about investment objectives and the strategic asset allocation are the biggest drivers of investment return, so the Fit for the Future consultation’s question about who has responsibility for the latter is crucial.
In a survey of LGPS members by the Pensions & Lifetime Savings Association (PLSA), 93% of respondents said they “would prefer to set their own strategic asset allocation”.
In its response to the consultation, Bromley Pension Fund, historically the most sceptical about pooling, warned the government’s preferred option could be financially damaging. It said most pools “have no experience or track record of providing asset allocation advice, nor sufficient resource to deliver it”.
Among the pools, views differed.
For LGPS Central, pools rather than funds should set the strategic asset allocation: “Given the expertise that should reside within the pool companies, we are of the view that it is most appropriate for the pool company to set the strategic asset allocation in line with the required funding objectives of their AAs.”
However, it noted this would be “a significant change” and “some AAs may wish to continue setting the SAA for their fund”.
Brunel took a different position: “The high-level local investment priorities and strategic asset allocation will have the greatest impact on outcomes for members and the local economy, so it makes sense for the AA to hold the responsibility for setting these objectives.”
And Northern LGPS, which consists of three of the biggest funds, saw a bigger role for funds, saying “pools should be able to operate segregated mandates for partner funds where there is sufficient scale to do this effectively”.
It said that “under a segregated structure we would hope the decision makers within the pool will be comfortable with more granular and bespoke SAAs reflecting the beliefs and preferences of the underlying AAs, as is the case we would argue for all global asset owners and fiduciary managers.”
For some, funds should be able to specify their asset allocation in more detail than the government’s proposed template would allow.
Consultants Hymans Robertson said funds “should be able to select from specific areas of the asset classes, such as residential or commercial property, or for higher and lower risk types of investments in these asset classes”.
And Unison was one of a number to call for funds, rather than pools, to decide whether to use active or passive management, and to be able to exclude certain assets, such as those linked to gambling, tobacco or arms.
But while the consultation may suggest a black-and-white division between funds and pools, some highlighted the reality of a more nuanced collaboration.
Laura Chappell, chief executive of Brunel, told LGC that although the government’s proposals only allow pension funds to allocate their assets into nine high level buckets, “within that structure we can allow for different flavours and more granularity”.
“Although the SAA says you have to do it in these buckets, it doesn’t mean that we can’t have sub-buckets underneath that, and our clients can express preferences.”
Laura Chappell, chief executive of Brunel Pension Partnership
And the Border to Coast pool said the SAA template was “only one part of the process,” stressing the importance of the relationship between pools and funds, saying they “need to work in a close, constructive, continuous and collaborative manner in both the development of investment strategy and its implementation, which should be recognised in any guidance”.
More immediately there is the question of what to do about legacy illiquid investments currently managed by the funds if they are required to transfer all of their assets to a pool, as set out by the consultation.
The consultation proposes transferring the management, rather than legal ownership, of these assets to the pools to avoid the potentially hefty legal and tax costs of the latter. While some pools, such as Local Pensions Partnership Investments, supported the suggestion on the basis that the government’s proposed model “only works if all assets are managed by the pool,” others were more hesitant.
Border to Coast answered “not necessarily – it depends how this is achieved”. It said “even providing pool level oversight may bring additional costs to the extent that the level of oversight increases,” but that benefits such as being able to assess and report investment and operational risks holistically “may outweigh such additional costs”.
And Ms Chappell called for pragmatism. Brunel is currently looking at the value for money implications, and Ms Chappell said there were “a lot more” such holdings than the pool had thought, covering a diverse range of assets, “so it’s harder to get the economies of scale there – what’s pooling going to add to that process?”
Fiduciary duty
A key question for the future of the LGPS is whether the more restricted role envisaged for funds allows them to meet their fiduciary duty – a cornerstone of the LGPS which requires funds to act in the best interests of their members.
The consultation document says allowing funds to set their investment objectives and strategic asset allocation lets them “ensure the investment strategy is appropriate to deliver its funding requirements and to pay pensions over the long term, and is therefore sufficient to satisfy its fiduciary duty”.
A fund cannot solely focus on high-level investment strategy … and still be considered to have met its fiduciary duty
Hymans Robertson
While many agreed, the degree of oversight and control funds have over their pools emerged as an important consideration.
In the PLSA survey, 94% of respondents believed funds would have to be able to set their own strategic asset allocations to meet their fiduciary duty.
The organisation stressed the importance of accountability: “Through clear delegation and subsequent oversight of the pool, each fund can remain accountable for the outcome so it can fulfil its fiduciary duty.
“It is important to have strong mechanisms in place to hold the pool accountable for performance, as pooling removes the option to change an asset manager in case of underperformance.”
The London CIV, Brunel, Border to Coast, Local Pensions Partnership Investments and Central pools said the proposals do meet the fiduciary duty.
However, Brunel’s response added “our partner funds may not feel that such a high-level approach would fulfil their fiduciary duty, and thus they may prefer to retain the ability to specify additional investment beliefs and objectives”.
And Northern LGPS said: “We believe it is crucially important to have effective pool governance arrangements in place which would allow AAs to set a more granular strategic asset allocation at some point in the future should the meeting of fiduciary duty subsequently be called into question.”
Hymans Robertson said although implementation “may not typically be the biggest driver of returns, it still plays a significant role in long-term financial outcomes”. It added: “Therefore, a fund cannot solely focus on high-level investment strategy, ignoring the implementation process, and still be considered to have met its fiduciary duty.”
And Unison also foresaw the potential for problems: “There is clearly a risk that in future pools will reduce the number of investment products offered to funds so that they cannot adequately reflect the investment strategies developed by each fund.
“This would frustrate the exercise of fiduciary duty by individual funds, and we look to government in developing guidance for funds and pools to ensure this does not happen.”
Financial Conduct Authority authorisation
If the government’s proposals would see funds emerge as much diminished bodies, the pools would have a much enhanced role. But to fulfil this, most would have to significantly build up their capacity and capability, with the government setting what many believe is an eye-wateringly tight deadline of March 2026 to ‘complete’ pooling.
The requirement to be an FCA-authorised investment management company makes this particularly tricky for three pools – Access, Northern and the Welsh pool – as they do not currently have this status.
We are working with our partner funds to ensure an effective and compliant outcome
Merseyside Pension Fund
The Welsh pool declined to share a copy of its consultation response with LGC, but Anthony Parnell, treasury and pension investments manager at its host authority Carmarthenshire CC, said it was “looking at” setting up its own FCA authorised pooling company.
He added: “We need approval from constituent authorities because of extra cost to individual funds to provide funding towards that company; we need time to hire suitably qualified personnel to work within that pool company.”
The Access pool also declined to share its consultation response, but pointed to its December statement which said it was exploring options, which “include building a new investment company”.
The consultation response of Northern said it did not believe FCA authorisation was “an indispensable requirement to having the expertise and capacity to implement investment strategies effectively for a small number of large LGPS funds,” but recognised “this would not be possible for a pool with a larger number of investors”.
One of its three partner funds, Merseyside, said “the government is clear it wishes to see further scale and, as FCA authorisation is to be a requirement, we are working with our partner funds to ensure an effective and compliant outcome”.
But the biggest concerns focused on the March 2026 deadline, something the PLSA described as “extremely improbable”.
The LGPS Advisory Board (SAB), a statutory body which oversees the LGPS, raised concerns the government was “requiring FCA authorisation by an earlier date than is feasible” to “effectively force pools to merge or collaborate more deeply than has been the case to date” – something it said was not appropriate.
For Northern, “arbitrary and potentially unrealistic deadlines increases the risk of failing to meet” the objective of delivering positive outcomes for stakeholders in the medium and long term. It suggested the March 2026 deadline should be “to demonstrate significant progress” or be changed to at least around 18 months.
Independent advice
Little has provoked more concern from funds than the idea they must “take their principal advice on their investment strategy from the pool”.
The government argues the current situation, where funds can each use their own investment consultant, leads to duplication and inefficiency across a pool, and says funds “may receive divergent advice from the same providers without clear justification”. This, it says, “inhibits asset pooling”.
There is a clear alignment of interest between the pool companies as the providers of advice and the AAs as the recipients of the advice
LGPS Central
The level of concern was great enough for 20 funds, from seven of the eight pools, to put their names to a paper by Hymans Robertson – which gives advice to some LGPS funds – which argued that “by forcing advice from a single provider, who then fully implements that advice and reports on performance, you remove competitively driven value for money, high service levels and innovation, whilst introducing conflicts of interest”.
The PLSA said it “believes the sign-off of the advice given by the pool should be conducted by an independent adviser working for the fund, or a suitably qualified investment consultant”.
And Bromley spelled out specific worries: “We question whether for a particular asset class, a pool would be prepared to allocate to a rival pool’s better performing sub-fund. In a bad case, they might choose not to include an asset class in a fund’s asset allocation strategy simply because they did not have a suitable sub-fund to implement it.”
LGPS Central, which supports pools acting as the principal investment adviser, said: “There is a clear alignment of interest between the pool companies as the providers of advice and the AAs as the recipients of the advice as a result of the pool companies’ not-for-profit status and that they are owned by the AAs. This alignment does not exist within the current advice model.”
It added that “in certain circumstances” funds may seek external advice “with the support of their pool company”.
For Brunel, the government’s proposal “would deliver a more joined-up, consistent approach when shared across 10 funds, offering lower costs vs where each fund receives unique advice. This should allow for further rationalisation of the underlying investments, lower investment costs and improved net performance over time.”
However, it noted “a number of our partner funds have different views regarding investment advice”.
And at least one pool, Northern, was sceptical, saying a model where the pools “provide investment advice which they would then also implement” has “real potential for conflicts of interest” because funds have “few credible sanctions” to ensure an alignment of interests.
It said that “as a minimum” funds “will need to retain the ability to commission independent advice to rely on as a second opinion”.
However, Chris Rule, chief executive of the Local Pensions Partnership Investments pool, dismissed fears of a conflict of interest.
Chris Rule, chief executive of LPPI
He told LGC that because the pool’s only job is to deliver results for its funds there is no incentive to provide bad advice, and there are no perverse incentives driven by the need to make a profit for shareholders. “Our view is that those conflicts are overblown,” he said, adding that some commercial players in the LGPS have conflicts of interest, and that some critics of the government’s proposals have a vested interest in the status quo.
Responsible investment
Although the rationale for ‘completing pooling’ is to reduce fragmentation in the LGPS, there are two areas of the government’s proposals some believe could undermine this.
Dawn Turner, former chief executive of Brunel, highlighted a contrast between funds being restricted to setting only a high-level investment strategy, but also setting their responsible investment (RI) policy and local investment objectives.
“A fund’s RI and local investment policies will be saying something very much more granular than their top-level strategic asset allocation,” she said. “There’s a bit of contradiction in terms of what’s being asked, and the pools are just not going to be able to do it at that level.”
Dawn Turner
When it comes to RI, a number of consultation responses highlighted similar concerns. As the PLSA put it, “at an extreme, the pool could end up having to create products specific for each fund, which goes against the principle of scale to reduce costs”.
The London CIV, which has 32 partner funds, said it was “concerned that as drafted the proposals potentially frustrate the objectives of pooling and create barriers to removing fragmentation and work against achieving scale as potentially individual partner fund strategies, depending on how they are expressed, could lead to expectations of tailored solutions”.
Mr Rule, of Local Pensions Partnership Investments, said best practice would be for a pool and its funds to “try and come up with a common set of beliefs and objectives. That doesn’t mean every fund has to have an identical set – it’s substantially similar.
“What you can’t have is things that are 180 degrees opposed to each other: ‘we will do this’, and ‘we absolutely won’t do that same thing’.”
Local investment
The government proposes that LGPS funds “set out their high-level objective on local investment in their investment strategy statement, including a target range for local investment as a proportion of the fund”.
They would be required to work with organisations like combined authorities to identify suitable local investment opportunities, with the pool carrying out due diligence, deciding what investments to make and managing them.
The final investment decision should be made by funds, informed by the pool’s assessment
LGPS Advisory Board
Hymans Robertson has called for the government to prioritise local investment above many of its other proposals. Iain Campbell, its head of LGPS investment, said: “First of all, focus on local because we think the priority should be things that might not happen without the pools doing it. The pools could be really helpful in helping local investment to happen, because they can provide the expertise and due diligence. Ultimately, if that doesn’t exist, we might not get increased local investment.”
LGPS Central said a successful local investment strategy would rely on effective partnerships between funds, pools, local and central government, and added: “However, the pool company will need to look across the benefits to all the pool’s partner funds as in any assessment of viability. It is why we believe that local investment targets are also best set at pool level.”
For consultants Linchpin, the government’s proposals could actually act against some local investments. It warned that local investments tend to require “much the same” due diligence as larger ones, so “there is a risk that having the pools do due diligence becomes a barrier to smaller local investments in particular”.
And for the SAB, funds rather than pools should have the final say: “As these decisions could be politically contentious it is appropriate that decisions are made by those who are politically accountable. The board therefore suggests that the final investment decision should be made by funds, informed by the pool’s assessment.”
The future
What comes next? With the government clearly in the hurry, a series of formal milestones may be passed in quick succession.
Most immediately, the eight pools have until Saturday to tell the government how they will ‘complete’ pooling by March 2026, with their submissions demonstrating “why a merger with another pool, or use of existing capability in an established pool company, would not be a more cost effective or otherwise more preferable approach to achieving compliance with the reform proposals”.
The government will also need to respond to the Fit for the Future consultation responses.
Ministers have promised to introduce a Pension Schemes Bill this parliamentary session, and the consultation said the government “will consider legislating to require in law the pool minimum standards … including transition or management of all assets”.
The government also plans to set out new requirements in regulations.
When the final proposals emerge, how might they differ from those set out in Fit for the Future – if at all? While no one expects any fundamental changes, some think the government may be open to tweaks to address some practical concerns.
One could be to address concerns about pools being principal advisors to their funds. Ministers could be open to a mechanism which provides some form of independent third party sign off of pool advice.
Another could be around a proposal for pools to manage illiquid assets held by funds that are coming to the end of their term, with some pools suggesting the costs would outweigh the benefits.
And a third could be around the March 2026 deadline for pools to meet the new criteria. Whether the government would accept pools making substantial progress in meeting all these objectives in 12 months’ time, rather than completing them, may depend on whether it is looking for a reason to merge some of them.
And so while 2025 might be looked back on as the year that councillors lost much of the pensions power, it might also be the year that some pools themselves ceased to exist.