Agenda item

The purpose of this report is to update the committee on the outcome of the Government’s Fit for the Future consultation.

Sawan Shah (Head of Finance Pensions and Housing Companies) introduced a report from the Corporate Director Finance & Resources, outlining the outcome of the Government’s Fit for the Future consultation.

In presenting the report, the Sub Committee was advised that in July 2024, the Chancellor had launched the UK Pensions Investment Review, which included proposals to improve the scale and efficiency of the UK’s defined contribution (DC) pension schemes and the LGPS. In November 2024, the Government had published its Fit for the Future consultation which included proposals in three key areas of the LGPS, namely to reform asset pooling, boosting investment in local areas of the UK, and strengthening the governance of administering authorities and LGPS pools.  Following this, the Government had published its final report on the UK Pensions Investment Review and its response to the Fit for the Future consultation and confirmed the decision to move ahead with the core proposals, setting out the final policy measures on pooling, local investment and fund governance with the key areas of focus identified as follows:

·            In terms of pooling arrangements, the London CIV had been set up as the designated pooling entity for the 32 London boroughs.  All pools had been required to submit transition plans to demonstrate how the proposed minimum standards could be met. Of the 8 regional pools originally identified, only 6 pool plans had been accepted with the government having concluded that proposals from the ACCESS and Brunel pools did not align with its vision for the future of the LGPS.  It was confirmed that this would not impact on the London CIV.

In relation to concerns regarding the accommodation of Fund specific requirements on responsible investment, the Government had stated that, to achieve scale, pools would not be expected to create a range of bespoke solutions to fit each fund’s ESG and RI requirements. Instead, funds would be expected to work together to reach a common approach although it had been acknowledged this may not always be possible, in which case more than one option could be offered. Funds would continue to set their individual investment strategy, with implementation being delegated to their respective pools. To facilitate this, members were advised pools would be required to develop in-house investment management and advisory capabilities, with a view to establishing themselves as investment managers (and therefore be authorised and regulated by the FCA).  Despite some opposition to the proposals, it had been agreed that pools would therefore be mandated to provide partner funds with principal advice on their investment strategies and whilst Fund’s would be able to procure advice from other sources, it was expected this would only be under exceptional circumstances.  Whilst the Government had originally proposed that all listed assets should be transferred to pooled vehicles by March 2026, with remaining legacy illiquid assets included, this had now been relaxed with the Government having stated that not all assets would need to be invested through a pool’s own funds (reflecting concern that it would not always make financial sense to transfer passive assets into a pool) but with the preference and default position remaining investment through a pool’s own funds.

·            The Government had also taken the opportunity to reiterate its encouragement for the LGPS to increase its investment exposure in the UK, with particular focus on exploring local investment opportunities covering areas which were broadly regional to the pool and its partner funds.  For the Brent Pension Fund, this would cover investments in the Greater London area.

Under these proposals, funds would be required to set a target allocation for local investment, outlined within their investment strategy. No statutory minimum had been prescribed for capital allocation; however, funds would be required to work with local authorities and regional stakeholders to ensure collaboration with local growth plans and prioritise opportunities which had the greatest impact. Administering Authorities would be required to disclose information relating to their local investments, including their target range and their impact, in their annual report. However, to simplify reporting and to avoid duplication, a key change in reporting requirements would be that pools would now be required to report annually on total local investments made on behalf of their administering authorities as well as their impact, although the metrics by which local impact was assessed had not be prescribed by the Government and would be decided locally between funds and their pools.

·            The main governance proposals being taken forward based on recommendations following the Good Governance project, undertaken by the Scheme Advisory Board (SAB). These included the requirement for partner funds to publish a governance and training strategy (replacing the governance compliance statement), outlining how knowledge requirements of members and officers would be met and also including a conflict of interest policy.  There would also be a need to appoint a Senior LGPS Officer who would hold overall responsibility for the management and administration of the fund, including the provision of advice to the Pension Fund Sub Committee and Pension Board and ensuring compliance with all statutory and regulatory obligations.  The proposals also included the need for pension committees to appoint an independent adviser, as a key driver of strengthening improvements in governance.

The Sub Committee noted the requirement this would place on committee members, the senior LGPS officer, and officers to have the appropriate level of knowledge and understanding of their roles, with requirements for pension committee members and local pension board members aligned and guidance for non-compliance also to be issued.  These changes would be supported by an independent review of governance arrangements every three years, with the aim of providing assurance that governance recommendations were being met aligned with the triennial valuation cycle.

Members noted and welcomed the additional briefing provided by Hymans Robertson as the Funds investment advisors on the consultation outcome, attached as Appendix 1 to the report with the Chair then inviting members to raise any comments, as summarised below:

·            In response to further details being sought on the reasons for the ACCESS and Brunel Regional Pools having been unsuccessful in their acceptance under the new LGPS pooling new arrangements, officers advised the basis of the decision by the government was still awaited with concern expressed by members at the apparent lack of transparency given the impact on those Funds directly impacted.

·            Responding to questions on the benefits associated with the new pooling arrangements, members were advised these reflected continuation of the approach already adopted by Brent through the creation of established funding pools. Without these pools, Brent would not have easy access to larger investment funds. This would result in Brent needing to pay higher costs leading their own tender processes, holding a smaller voice in sector discussions due to only being a small percentage of any investment fund. Regional pools were able to provide benefits of larger scale, greater access to investments, better investment advice and lower investment management fees.  In addition, it was also expected that the London CIV’s internal investment and management capabilities would be expanded providing further economies of scale as well as being beneficial to collective fund growth.

·            Discussing the next phase of the scheme, officers stated that the London CIV was now engaging with all Funds in seeking to develop their transition plans. Brent was stated to be in an advanced position, due to the level of investment assets already held under pooled management. Looking to the future, Brent’s Pension Fund was likely to have three options available to it, firstly when a commonality of mandate between pools was present existing mandates could be transferred into the pooled one. Second, LCIV could create new funds to facilitate the ones already holding Brent’s investments. Thirdly, the option to create a new layer of oversight in pre-existing funds were available.

·            Following on, members queried if officers believed returns could be compromised or decreased following adoption of the new pooling arrangements.  Recognising the concerns raised (and additional focus on local investment) these had been acknowledged with the aim being, as part of any transition, to ensure pools remained focussed on increasing returns. As such, Brent would now be expected to scrutinise the choices made by LCIV in implementing investment strategy. Kenneth Taylor (Hymans Robertson) related this model to the UK housing fund already established by London CIV.

·            In noting the scale of change in terms of the current Fund investment strategy, given the dependency moving forward on performance of the London CIV members recognised the enhanced level of oversight required by the Pension Fund Sub-committee in monitoring LCIV’s performance given the more limited control over investment decisions under the pooled funds with the level of work required to deliver a successful transition also acknowledged.

With no further queries raised, the Chair thanked Hymans Robertson and the Finance Team for the update and the Sub Committee RESOLVED to note the report and ongoing need to ensure progress in relation to the transition arrangements were kept under review.