Our perspective on the UK’s Pension Scheme Bill: Five key considerations for LGPS Funds

The UK pensions industry is undergoing a wave of transformative reforms that are expected to reshape the landscape. How might the UK’s biggest pension reform change the way LGPS funds operate?

LGPS pools are set to take on greater decision-making responsibilities on behalf of their partner funds, while also expanding into a broader range of asset classes. At the same time, growing demands for governance, transparency, and reporting mean that the coming years will be pivotal for both LGPS pools and their partner funds.

At Ortec Finance, we are proud to have supported pension funds since 1986, including through major pension reforms in countries such as Australia and the Netherlands. As the LGPS enters a critical period, we draw on our decade-long collaboration with many of its pools to highlight several key considerations particularly relevant to their context.

Rising transparency expectations as responsibilities shift

Under the reform, LGPS pools will take on greater responsibility for investment decision-making across their partner funds. This significant shift will increase the need for transparency throughout the investment process, requiring reporting of the added value generated by decisions made by both pools and their partner funds.

As this shift in responsibility will occur gradually, pools with a forward-thinking mindset should consider implementing a flexible reporting system that can adapt to evolving reporting needs throughout the transition.

Increasing portfolio diversification to warrant further flexibility in Strategic Asset Allocation (SAA) analyses

The UK Government’s recognition that pension funds are a major source of domestic investment, particularly in private assets, has been a key driver of the reform, alongside its objective to improve pension outcomes and retirement security across the country. Individual partner funds, each with a unique mix of local investments and varying returns and volatility, will be overseen by LGPS pools with growing investment responsibilities that also need to balance local investment obligations while helping achieve the partner funds’ desired returns. 

Against this backdrop, an LGPS pools’ ability to model a wide range of asset classes against liability structures and output metrics, while accounting for the unique characteristics of private assets, will become invaluable in helping them achieve the long-term goals of all stakeholders involved.

What about climate change’s effect on asset values and returns?

The increasingly visible effects of climate change, such as heatwaves, are raising concerns about the resilience of a partner fund’s investment strategies to deliver stable long-term returns. Combined with the insufficient pricing of climate risk, an LGPS pool should consider prioritizing the integration of climate change into its broader risk management framework sooner rather than later. 

One option is generating quantified climate risk insights across all asset classes and benchmarks for individual partner funds, which can be integrated with traditional risk analysis results to help strengthen the overall investment process.

More partner funds, more reporting across multiple strategies and benchmarks

Each individual partner fund within an LGPS pool maintains its own unique, standalone investment strategy and long-term benchmarks. As asset pooling expands, the current requirement for pools to report only on individual portfolios may evolve. This could require pools to extend their reporting to cover their partner funds’ entire investment hierarchies, not just their standalone portfolios.

By recognizing that each partner fund has its own specific reporting requirements, pools should anticipate a substantial overall increase in reporting volume. It is worthwhile to be prepared to implement a performance measurement and attribution framework that can easily accommodate decision structures across any investment hierarchy, while efficiently generating reports in a flexible manner.

Addressing immediate resourcing needs while fostering long-term in-house capabilities

Each LGPS pool is anticipated to build a fully operational in-house investment team over time, strategically investing in internal modelling and resourcing to support the evolving needs of its partner funds. The foremost challenge lies in striking a balance between fulfilling each individual fund’s immediate needs, including delivering assurance on the quality of pension management services during the transition, while maintaining focus on long-term planning and objectives. 

To address this challenge, LGPS pools turning to external resourcing for immediate needs should seek flexible arrangements that allow them to switch between in-house, outsourced, and hybrid models as their internal resources and capabilities evolve. Ideally, these arrangements should also enable internal teams to focus on specific areas based on their preferences and capacity.