UK unleashes its plans for mega funds

Industry participants have reacted positively to the UK government’s proposed evolution to the local government pension pools, but some pool executives say more clarity is needed on the suggestion that reform could see the establishment of new pool companies or mergers between pools. Either way, the reform signposts significant capacity building and costs for all pools, whatever their starting point.

In her first Mansion House speech last week Chancellor of the Exchequer, Rachel Reeves, launched the government’s much-anticipated, mega fund remedy to drive investment in productive assets and back Britain.

She called for more rapid reform of LGPS pooled funds, including individual funds fully delegating the implementation of investment strategy and taking their principal advice on their investment strategy from the pool.

Pools would need to set up FCA-regulated investment management companies with the expertise and capacity to implement investment strategies. In another change, the individual pension funds would also be required to transfer legacy assets to the management of the pool.

Since 2015 the LGPS has come together into eight groups to manage their investments through asset pools. But they have developed different models and less than half of the total LGPS assets have been pooled. It means the full rewards of low costs and scale that have fuelled analytical expertise, portfolio efficiency, liquidity management and access to private markets amongst Canadian and Australian super funds, remains out of reach.

“Few in the scheme would disagree that pooling has not delivered to its full potential and that change is needed to ensure that the scheme continues to perform in the long term,” states the government in a consultation document the industry is invited to respond to over the next nine weeks.

“The government’s view is that full, effective and consistent delegation of strategy implementation is needed to ensure the benefits of scale and ensure that decisions are taken at the appropriate level by people best placed to make those decisions,” it states.

Five of the pools are already standalone FCA-authorised investment management companies. But two have an outsourced model that relies on external providers, and one has a model in which a joint committee provides oversight, but the partner funds retain management of most assets.

It signposts significant capacity building and costs for all pools, whatever their starting point.

Even the five pools which already constitute investment management companies will need to develop new capabilities to build capacity on local investment – another stated priority – and provide advice on investment strategies to funds, states the government.

The government’s quest for reform has been welcomed in some quarters.

“We are supportive of the model being outlined for the evolution of pools and the way they work with their funds,” says Richard J Tomlinson, chief investment officer at Local Pensions Partnership Investments. “We strongly advocate the ability of pools to be the principal provider of investment advice and that all investment implementation is delegated to the pool, with all assets being managed by the pool.”

“Our experience at LPPI is that this model, combined with scale and the establishment of internal investment teams, delivers better outcomes for funds and ultimately the members. This experience and our track record in delivering investment advice and implementation is reflected in the structure outlined in the consultation.”

Fewer pools?

The government acknowledges the changes may trigger a shakeup in the number of pools. Reform could see the establishment of new pool companies, mergers between pools, or existing pools becoming clients of already FCA regulated managers for some or all services required.

However, the lack of clarity on this point is already a concern for Tomlinson.

“The drive for pools to have these changes in place by March 2026 should support increased engagement between funds and across pools. Whilst there was no explicit requirement for pools to merge, there is guidance that where pools have existing capabilities, other pools should look to work together. We believe this can be the catalyst for cross pool collaboration and ultimately consolidation; to create greater scale and efficiencies and we would have liked the consultation to have been clearer about this end objective.”

Calls for clarity where also made by Laura Chappell, chief executive of Brunel Pension Partnership, speaking to Top1000funds.com in the build up to the latest announcement.  “The government needs to ensure it offers a clear steer, coupled with consistent policy that is properly enforced – it’s worth remembering the role of policymakers in creating the Maple 8,” she said.

The government has also said it wants to transform governance. Committee members would be required to have the appropriate knowledge and skills; the pension funds would be required to publish a governance and training strategy (including a conflicts of interest policy) and an administration strategy. Within the pools, they would also need to appoint a senior LGPS officer and to undertake independent biennial reviews to consider whether they are fully equipped to fulfil their responsibilities.

Pool boards would be required to include representatives of their shareholders and to improve transparency.

DC reform

Australian pension schemes invest around three times more in infrastructure compared to the UK’s DC schemes and 10 times more in high growth businesses and private equity compared to their UK equivalent, says Reeves. Meanwhile Canadian teachers and Australian professors reap the rewards of investing in productive UK assets through their pension schemes rather than British savers.

In addition to forcing the fragmented 86 LGPS pension funds that collectively manage £400 billion to accelerate pooling, Reeves outlined new legislation to push the UK’s DC pension funds, forecast to manage £800 billion in assets by the end of the decade, into mega pools of £25-£50 billion.

Mark Fawcett, chief executive officer of NEST Invest who was at Mansion House when Reeves gave her speech, says the fund was supportive of the government’s position.

“We see the benefits of scale and are experiencing those ourselves,” he told Top1000funds.com. “We think more consolidation in the DC sector is positive.”

Nest Invest currently manages over £46 billion and is expected to grow to £100 billion by 2030 fuelled by contributions of about £500 million a month alongside investment returns.

About 20 per cent of the fund’s assets are invested in the UK and it continues to expand its private asset investments in infrastructure and property and announced a recent joint venture with PGGM and LGIM around housing.

“We are very committed to investing in private markets in the UK where we see attractive investments,” Fawcett says.

Will it work?

It remains to be seen whether mega funds will trigger more investment in the UK.

LPPI argues bigger pools aside, the government needs to do more to remove the disincentives that are blocking capital in supporting key strategic activities. In a recent paper, the investor argued that the government can make more projects investable by reducing execution risk for investors.

Moreover, many of the pools say they are already substantial investors in the UK.

LPPI currently has 20 per cent of its portfolio invested in the UK, the large majority in private markets where social impact is greatest.

The £30 billion Greater Manchester Pension Fund (GMPF) the UK’s largest local authority scheme recently ploughed more money into affordable housing, targeting 30 per cent of its 10 per cent allocation to real estate to the UK’s residential sector.

Private sector DB funds, off the menu

Reeves speech did not detail plans to reform the UK’s £1.4 trillion private sector DB pension fund industry (separate from the LGPS) in a source of frustration for many hoping for guidance, especially on how corporate schemes can use their surpluses.

Morten Nilsson, executive director and CEO at Brightwell which manages around £37 billion of assets on behalf of the United Kingdom’s BT Pension Scheme, BTPS, as well as assets of the DB arm of the EE Pension Scheme, believes these corporate pension funds are well positioned to support economic growth and better outcomes for members, particularly by investing in the transition.

Speaking during a webinar, he said low carbon infrastructure assets offer a particular opportunity for these mature, low risk investors looking for stable, predictable, inflation-linked returns, that also meet their net zero targets.

“You can’t have better investors in your critical assets than local pension schemes because we can’t run away,” he said.

He warned that the complexity of galvanizing investment in productive assets from these DB funds will require more than “a newspaper headline.”