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Councils in England and Wales that manage £145bn of assets have hit back at government plans for a series of pension “megafunds”, warning that the pools could leave them on the hook for decisions over which they have little control.
Twenty-six local government pension funds have called on chancellor Rachel Reeves to remove a requirement for town halls to take their “principal advice” on asset allocation from the pools that manage their assets, in a report seen by the Financial Times.
Councillors are concerned this could make it difficult for them to hold pools to account and could lead to conflicts of interest if the needs of the pool and the council — which has responsibility of paying pensions — do not align.
“If we become legally mandated to use a pool for all of our investments — having to take principal advice from that entity seems to be a conflict of interest that we can’t get over,” said Jennifer Devine, head of pensions at the £3.5bn Wiltshire pension fund.
The paper, which was co-ordinated by independent consultancy Hymans Robertson, argues the proposals would remove competitively driven value for money, while only 9 per cent of 80 funds polled supported taking primary investment strategy advice for their pools.
“If funds lose access to independent advice, there is an increased risk of creating a democratic deficit and weakening the connection to local accountability,” the report said.
“If everything is done by the pool and the pool is marking its own homework that raises big questions to us on how that could be managed,” said Jo Kempton, head of the more than £3.5bn Lincolnshire Pension Fund.
Nick Chard, vice-chair of Kent County Council’s Pension Fund Committee, which administers a fund with assets of £8.1bn said policymakers “can’t have it both ways”.
“If the government wants to tell us how to do things then they have to underwrite any consequences which are potentially increased pension contributions,” he said.
Concerns among some councillors have risen after Torsten Bell, a vocal supporter of local government pension scheme reform, was appointed as pensions minister this week.
Bell has previously said that assets held across the 86 local councils of England and Wales “should be brought into one consolidated fund”.
The government has not gone this far, instead proposing that local councils hand over the management of all £392bn of their combined assets to one of eight pools — or so-called megafunds — by March 2026.
This will accelerate an existing trend as councils already invest some of their funds through these pools. By last March, about 45 per cent of local government pension assets were invested via pools’ sub-funds.
The government has said that strategic asset allocation decisions can remain with local authorities, who will be responsible for setting contribution rates and ensuring that pensions are paid on time and in full to scheme members.
But under the proposals local authority pension funds would be required to “take their principal advice on their investment strategy” from the pool, according to a government consultation which closes on Thursday.
The government hopes that by consolidating and streamlining the investments of the LGPS it will drive down costs of running the scheme and free up billions of pounds for investment in British infrastructure and scale up companies.
It modelled its analysis on Local Pensions Partnership Investments, one of eight existing pools, which manages the pension assets of three council pension funds and already operates as a fiduciary manager providing investment advice to the councils.
Richard Tomlinson, chief investment officer at LPPI, which has acted as adviser and investment manager for council funds for the past eight years pushed back against accusations of potential conflicts and said the model “works really well — the proof is in the pudding”.
“Think about the conflicts inherent in the traditional consulting model . . . some of the consultants are fiduciary managers themselves,” he said. He added that while choice of adviser could have its benefits it also created an incentive for portfolio churn.
Tomlinson noted that the government’s proposed model was consistent with how international funds operate, such as in Canada, and was in effect an “outsourced chief investment officer” system.
The ministry of housing, communities and local government said it did “not accept that it would be a conflict of interest for pool companies owned by LGPS funds to provide advice on investment”.
“The firms are controlled by their partner funds, exist to provide services to them, and do not benefit financially if their partner funds take advice,” it added.
