Investment Pooling - Q&A for LGPS Employers
Why did investment pooling happen?
Across the LGPS in England and Wales the scheme holds £276bn of assets (as at 31 March 2020). These assets are currently held in eighty eight local pension funds and are used to pay the pensions of former members of the Scheme and their dependants. The LGPS is one of the largest funded pension schemes in Europe.
The Government commissioned research in 2015 which indicated that significant savings could be delivered by the creation of a pproximatelysix investment pools, each with assets of at least £25bn. Each LGPS administering authority was then obliged to join, or help create, an investment pool with other LGPS administering authorities.
Savings would be achieved through economies of scale and increased bargaining power; investment costs would be reduced along with other costs for all types of investment used in the pool.
The Government also wanted the LGPS to have the capacity and capability to invest in infrastructure e.g. railway, road or other transport facilities or housing supply. At the time only a very small proportion of LGPS assets were invested in infrastructure, it was hoped that the creation of investment pools would make it easier for LGPS funds to invest in infrastructure due to their increased scale.
Did the changes affect my employer contribution rate?
Not directly. As an employer you pay the balance of the cost of providing member benefits, after taking into account investment returns and employee contributions. Every three years, a qualified actuary calculates how much you should contribute to the Scheme.
If the anticipated reduction to investment costs are realised and the current overall investment performance is maintained it is possible that this could impact positively on employer contribution rates. However, it is important to remember that other factors, such as changes to life expectancy, the profile of your workforce and the length of deficit recovery periods are the main drivers of your organisation’s contribution rate.
In addition, it was expected that the anticipated cost savings will not materialise for a number of years due to the costs that will be incurred in implementing and moving assets into investment pools.
To ensure the long term sustainability of the scheme a cost management process is now in place in the LGPS in England and Wales for member benefits being built up from 1 April 2014 onwards. This monitors the cost of the scheme to ensure it stays within agreed parameters as set by the Scheme Advisory Board and HM Treasury.
Should costs increase outside those parameters future changes to the scheme design may be required. Further information about the cost management process is available on the Scheme Advisory Board website here.
Who is responsible for deciding how a fund invests its assets and did this change?
Each LGPS administering authority decides how the assets for that fund are to be invested in line with its agreed investment strategy and agreed approaches to risk, diversification and corporate governance.
This did not change when assets were invested via the new investment pools from April 2018.
Did the administration of the LGPS also change?
No, the Government only required LGPS administering authorities to pool the investment of their assets. There was no requirement for any change to the administration of the LGPS.
The LGPS administering authority that administers the Scheme for your employees and ex-employees did not change as a result of these changes.
What was the timetable for investment reform?
Administering authorities were required to submit their final proposals for investment pooling to Government by 15 July 2016. The final proposals were expected to confirm each authority’s commitment to pooling and provide detail on how the arrangements they have made with other authorities met the criteria published by Government in November 2015.
The proposals, if assessed as meeting the criteria, were taken forward with the investment pools becoming operative from April 2018. Assets started to be moved into investment pools from April 2018 with illiquid assets, such as property, taking longer to transition than others.
The Government planned to introduce legislation to allow the Secretary of State to intervene in the investment function of an administering authority where it has not had sufficient regard to government guidance on pooling.
Where I can find out more information?
Further information about investment reform is available on the LGPS Scheme Advisory Board website here
If you wish to find out how the LGPS administering authority that administers the Scheme for your employees and ex-employees complies with the investment reform criteria you should contact them directly.
