Sorry, but it’s time to start caring about Local Government Pension Schemes #NewsMarket

Stay informed with free updates

Simply sign up to the Pensions industry myFT Digest — delivered directly to your inbox.

It’s hard to think of a string of words less likely to excite the casual reader than ‘Local Government Pension Scheme’.

But weighing in at a cool £431bn, UK local authorities’ retirement assets are massive. They’re important to their 6.1 million members, to Council Tax payers, to the Treasury’s hope of inward investment, and also for UK asset managers’ bottom lines.

This week, as ably reported in MainFT, chancellor Rachel Reeves made headlines by having the kind of meetings that look from afar like tyre-kicking around potential consolidation. So we thought a light explainer — and some epic dataviz — might help you get up to speed with what it all might mean.

Today, the LGPS is a single scheme. Its members across England and Wales can interface with a single website. But assets are managed by 86 different administering authorities. Each of those — think the London Borough of Barnet, or Gloucestershire County Council — manages its own multiemployer fund.

The whole thing looks crazy-complicated to operate, with over 18,000 separate employers contributing different amounts depending on the demographics of their workforce, funding level, etc. Each administering authority has a committee of elected councillors, who set and oversee strategic asset allocation decisions, pick their own fund managers, investment consultants, actuaries, auditors, lawyers etc. Here’s a snapshot of Cambridgeshire County Council Pension Fund’s external partner list from their draft annual report:

This is not atypical.

In the early 2010s, the then-Government decided that this fractured asset landscape didn’t look exactly optimal. So, following two years of consultation, it announced that all the administering authorities would have to join what they envisaged would be six ‘British Wealth Funds’, each with at least £25bn in pooled assets. In perhaps the closest pensions could get to the feeling of a football transfer deadline scramble, every administering authority coalesced around eight brand new institutions. Not everyone was happy about this. Kensington & Chelsea, for example, have so far refused to pool a penny.

Fast forward a decade, and how are things looking on the pooling front? Well, they’re sort of getting there. It took a few years to set up the eight pools, and local authorities are still mostly in the process of transitioning portfolios over to them:

What does pooling actually do? In a world where all these assets were pooled, it is conceivable that nothing that crazy would actually change. Although sometimes it does.

Let’s step back.

Pooling companies can differ wildly in their offering, so the implications of pooling vary by provider.

For example, administering authorities choosing the London CIV can select from, and switch between, nine global equity funds, five fixed income funds, four multi-asset funds, two infrastructure funds, three real estate funds, and a private debt fund. It’s a sort of Hargreaves Lansdown-style fund supermarket model for pension funds. Meanwhile, the Local Pensions Partnership offers a whole-scheme fiduciary relationship, managing not only client assets (using a mix of internal and external teams) but also liabilities.

It makes sense for LGPS administering authorities to pool their buying power. But with elected councillors continuing to sit on investment committees, and having ownership of their differing and changing asset allocation decisions over 86 different pots of money, it would be weird to expect the outcome to look less fragmented than our rather wonderful alluvial diagram above shows it to be.

A move to consolidate the assets of English and Welsh local authorities into a single pot would create a fund larger than Calpers or the Canadian Pension Plan.

Bung in Scottish assets and it would eclipse the Dutch ABP to become the fifth-largest pension fund in the world (if we pretend the Norwegian Oil Fund is actually the pension fund it claims it is).

Creating such a massive fund would change things a lot. It would allow the LGPS to pursue a so-called Canadian model of investment management (essentially, a lot more in-house management of assets and allocation to private assets, without paying lots of fees to external asset managers).

But you know who would really hate that idea? External investment managers.

To get a sense of how important LGPS pensions are to investment managers, we can look at data from the UK asset management trade body, the Investment Association. The chart below shows a breakdown by client of the total UK institutional client market (which is the largest part of the total client base). Local Government Pensions in bright pink:

UK asset managers have around £266bn in mandates from local authorities. This is around 7 per cent of total UK institutional AUM, so not nothing. We don’t have a breakdown of total fees paid specifically to UK asset managers, but the LGPS administering authorities paid out £1.3bn of management fees, and a further £180mn of performance fees in 2022-23.

We’re not suggesting that an amalgamation of administrative authority assets is something just around the corner. But if it did happen — and management was moved in-house along Canadian-style lines — the impact would be huge. Huge as a source of funds for potential strategic infrastructure projects, for sure. But also a huge headache for struggling UK asset managers.