LGPS – a primer to prep for 2024
Local government pension schemes (LGPS) are undergoing significant changes, many of which will have a significant impact on their investment strategy. Here is a primer of everything that happened in 2023 and the things you should watch in 2024.
LGPS assets to grow but be concentrated in fewer pools
There is about ￡270bn in Local Government Pension Schemes (LGPS) as of 2023 – this is equivalent to just 60% of the trust-based defined contribution (DC) market and under 20% of the corporate defined benefit (DB) market. The LGPS assets are currently held in about 100 pension funds and eight asset pools, according to the PLSA . Funds range in size from around ￡500m to ￡25bn, with a majority holding less than ￡5bn each, according to a recent government consultation .
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The number of pools is expected to reduce as the market consolidates further – the Autumn statement expressed the government’s desire to see pools exceeding ￡50bn by 2025 and ￡200bn by 2040. This implies there may be as few as four to five pools by that time, down from currently eight.?
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Will LGPS focus on investing in the UK economy?
The aggregate funding position of LGPS improved further over the course of September, reaching 107%, according to Isio’s Low-Risk Funding Index . The improvement is a result of an increase in government bond yields. In fact, Isio estimate that the LGPS has a surplus of ￡100bn .
The strong funding position and sponsor covenant of LGPS schemes allows them to play a bigger role in ‘levelling up’ the UK economy. The government is encouraging schemes to meet their ‘core fiduciary duty’ of funding pensions while also investing in infrastructure, housing, regeneration, and small and medium enterprise (SME) finance across the UK. These investments are particularly important given that a growing number of local councils have issued section 114 notices in recent years and are facing spending cuts.
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A major new set of requirements
2024 will see the introduction of new climate reporting requirements for LGPS schemes, which are broadly in line with the Department for Work and Pensions (DWP) requirements for corporate DB and DC plans. However, these will apply to LGPS regardless of their size, and the first round of reporting should be completed by December 2024. ?
These reporting requirements include:?
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How big of an appetite for growth assets?
The ongoing reforms also include a 10% allocation ‘ambition’ (but not a requirement) to investments in private equity. The Autumn statement estimates this could unlock around ￡30 billion to invest in what the government terms ‘the UK’s most innovative companies’ in sectors like science and technology, via an investment vehicle which is currently being developed.
Two investment vehicles will be created for pension funds to invest in under the Long-term Investment for Technology and Science (LIFTS) initiative. Separately, a new ‘Growth Fund' will be established within the British Business Bank (BBB) to invest in promising high growth companies and benefit from BBB's market access as the largest domestic investor in UK venture capital.
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A year of change ahead
Given the extensive regulatory developments they saw in 2023, local government schemes are already evolving their asset allocations and investment plans. To help the industry stay ahead of these changes, mallowstreet plan the following:
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Get in touch with [email protected] if you would like to be involved.