Government proposals for the Local Government Pension Scheme (LGPS) to disclose their asset allocations and potentially bring in stricter requirements if this does not lead to increased investment in UK equities could create “a challenge” to fiduciary duty, according to Hymans Robertson head of LGPS investment, Iain Campbell.

In the Spring Budget, the government announced that LGPS funds in England and Wales will be required to disclose a breakdown of their asset allocations, including UK equities, and the government will review whether further action should be taken if this data does not demonstrate that UK equity allocations are increasing.

Responding to the announcements, Campbell said that the new disclosure requirements did “not come as a huge surprise”, but the focus on UK equities had “raised some eyebrows”.

“This appears to be another shift in the government's wording around the role they wish UK pension funds to play in supporting the UK economy,” he continued.

“Previously, the focus has been on ‘venture and growth capital’ and ‘productive finance’, so further clarity will be needed on what exactly, will be defined as UK equities, and whether this is just one of a number of UK asset classes that will need to be reported on.

“It was also surprising to see the government state that stricter rules may be brought in if the reporting requirements do not lead to increased investments in UK equity.

“Great efforts have been made to diversify investments globally, opening up a larger investment opportunity set, and any reversal of this could well create a challenge to fiduciary duty.”

These concerns were echoed by Aon head of LGPS governance, Mary Lambe, who argued that reporting on the percentage allocated to UK equities will not, of itself, change investment behaviour and, from a governance perspective, “nor should it”.

“As noted in our response to the recent consultation ‘Next Steps in Investment’, we don’t believe government should be mandating how LGPS funds invest, and it is not clear how that fits with the fiduciary duty of pensions committees,” she stated.

Aon associate partner, Louis-Paul Hill, pointed out that LGPS funds tend to have a much higher allocation to growth assets, such as equities, than their private sector counterparts, due to their long-term nature and the security of both employers and benefits for members.

“However, while it is true that funds’ allocation to UK equities may well be lower than government would like, and is likely to have fallen materially over time, it’s important to consider why that is the case,” he added.

“Funds invest in order to deliver the benefits to members cost-effectively for their employers, which means investing to generate the best risk-adjusted returns.

“UK listed companies make up only around 4 per cent of the total global equity market and UK equities, as measured by the FTSE-All Share index, have returned around 7 per cent per year on average compared to 10.5 per cent per year from the MSCI All World Index over the last 20 years - and/or an average of 5 per cent per year compared to 13 per cent per year over the last 10 years.

“This supports Aon’s, and many LGPS funds’, preference to invest globally through considering a global investment opportunity set.”

Pensions and Lifetime Savings Association director of policy and advocacy, Nigel Peaple, welcomed the announcement of revised guidance for the LGPS, but said that LGPS funds already had a high burden of reporting compliance, so it would be important to ensure that the new requirements were “reasonable and proportionate”.

The Budget also mentioned that LGPS funds’ standardised data returns will provide greater clarity on the progress of pooling, and Local Pensions Partnerships Investments CEO, Chris Rule, said that better utilising scale within the pensions market had the potential to be a “major driver” of both efficiency and stronger returns for funds and members.

“Consolidation can remove needless layers of decision-making, and allow investment managers to be more agile,” he stated.

“Indeed, most fund liabilities, and therefore investment needs, are more similar than they are different – particularly in the LGPS space. This will mean that with greater consolidation there will be fewer building blocks required to implement a suitably tailored investment strategy. The Chancellor’s announcement on better consolidation is therefore the right move for funds, investment managers and, most importantly, savers and UK plc.”

The government also said it would work with the LGPS to consider the role it could play in unlocking investment in new children’s homes.

“With regards to the potential for the LGPS to help with funding for building more children's homes, this was again somewhat of a surprise,” said Campbell.

“It can only be presumed that it ties in with the government's Levelling Up agenda, albeit it on a somewhat more focussed issue.

“Given the purpose of the LGPS and the fiduciary duty of pensions committees, this must be done in a way that stacks up financially for the LGPS - the risk-adjusted returns must be acceptable, and the governance requirements cannot be too burdensome.

“We must always remember that the LGPS is there to pay benefits, not to make up government spending shortfalls.”

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