Thinking big, thinking local: understanding the Pensions Schemes Bill
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Written By: Darren Beach |
The pension industry is braced for a whirlwind of change after the publishing of the Pension Schemes Bill. Darren Beach investigates the impacts of the bill on the LGPS, as it aims to “consolidate and professionalise” the scheme.
The government’s Pension Schemes Bill, introduced in June 2025, put forward sweeping reforms aiming at modernising the whole pension sector. Variously welcomed as “a game-changer” (chancellor Rachel Reeves), a “once in a generation opportunity” for workplace pensions (The Pensions Regulator), a “pivotal moment” and a “blockbuster” by senior industry figures, the bill’s headlines include automatic consolidation of small defined contribution (DC) pots, the creation of £25 billion DC mega-funds, a value for money framework, and mandatory default income solutions at retirement.
But what does it mean for the LGPS?
The bill states that it intends to “consolidate and professionalise” the LGPS, enshrining in law the requirement for funds to hold assets in six pools (rather than the previous eight), mandated by March 2026, with the aim of investing in a wide range of private market opportunities in local areas.
The government has said the reforms aim to “tackle fragmentation and inefficiency” in the LGPS. Some of the key changes include:
Reforms to asset pooling: Pools must meet “minimum standards” that include Financial Conduct Authority (FCA) authorisation, delegation of strategic asset allocation advice and implementation, publication of performance/costs, and carrying out due diligence on local investments.
In addition, the Secretary of State now has a power to direct funds to move between pools, to reach the six-pool structure. Finally, the bill leaves room to enforce compulsory LGPS fund mergers under the Public Service Pensions Act should local decisions be deemed inefficient.
Local investment requirements: Administering authorities (AAs) must now provide an Investment Strategy Statement that proposes a target range for investments within the local area of the fund or other funds in its pool, engages with devolved bodies to look for local opportunities, and ensures that pools can meet their due diligence and reporting obligations.
Governance requirements: These reforms are intended to boost scale, efficiency, and transparency across the LGPS. AAs must now either be shareholders or clients of one of the asset pools, and they must appoint a senior LGPS officer with responsibility for scheme management. Finally, each AA must conduct an independent governance review every three years, with recommendations submitted to the Ministry of Housing, Communities and Local Government (MHCLG).
How is this reform different from previous LGPS reform?
Pooling is, of course, not new. This new bill is more prescriptive, which represents change for the LGPS as investment advice and implementation will be totally outsourced to pools, yet not all the pools are currently equipped to provide these comprehensive services, according to Heather Fleming, Managing Director, Institutional Business at Gresham House.
“The councillors are still responsible for how the pension fund performs, yet a lot of decision-making is being outsourced to pools,” she says. “It presents some very real governance challenges and conflicts which need to be thought through carefully.”
In effect, strategic asset allocation remains with the administering authority, but the day-to-day asset-allocation decisions and execution are handled by the pool.
Another impact of the bill is that, by the March 2026 deadline, LGPS legacy assets including both listed and illiquid holdings must be transferred to the FCA‑authorised asset pools, with full implementation delegated to those pools.
Fleming suggests that the direction of travel has been moving this way for some time already: “Positive progress has been made already with a significant percentage of LGPS assets already sitting within the pools. It’s crucial that pension funds can gain comfort that legacy assets are overseen and monitored appropriately.”
“In terms of new local investment and the unlocking of potential investment opportunities, that is where I believe there should be interaction between the AAs and the pools and, where relevant, external managers. The sourcing and origination of investment ideas can be a collaborative effort,” she added.
Explaining the government’s “backstop” power
Clause 5 of the bill allows for compulsory mergers of LGPS funds, which raises the question – under what circumstances might the government use this power?
“The government’s strong preference is that any pension fund mergers take place by agreement between administering authorities,” a spokesperson from the MHCLG told us.
“However, this power will allow government to intervene, if local decision making is not effective in bringing about satisfactory arrangements.”
Upon the bill’s launch, pensions minister Torsten Bell appeared keen not to represent it as overtly prescriptive in that sense, telling journalists: “I would see that very much as a backstop power, and it’s not to do with directing people to which pool they wish to be part of.”
The so-called “backstop” power allows the Secretary of State to force underperforming funds to join or leave specific pools under what it calls “prescribed circumstances”. It can also reallocate assets and responsibilities between LGPS pools if they’re judged to be non-compliant or inefficient.
Those “prescribed circumstances”, according to the MCHLG spokesperson, are to “ensure the process of moving from eight LGPS pools to six does not result in any administering authority being left without a pool, and to protect the scheme in the long term.”
“This power only applies if a fund fails to meet the governance and pooling minimum standards outlined in the bill, so there are a number of caveats. The devil is in the detail,” Fleming added, highlighting the importance of funds maintaining professional governance and decision-making.
Local investment: at the heart of the bill
The bill defines local investment as “those [investments] within the local area of the fund or other funds in its pool”. This is a departure from the rhetoric of the past government, which often referred to local as meaning UK-wide, and a clear definition may be welcomed by many LGPS stakeholders.
The six regional pools in England and Wales are obliged to identify and invest in opportunities that support regional economies, such as affordable housing, small and medium-sized enterprises, clean energy investment, local infrastructure, and physical regeneration.
A MHCLG spokesperson said: “Local investment should have some quantifiable external benefits to the area in question, for example economic growth, environmental benefits or positive social impacts.”
The Secretary of State holds regulatory powers over pooling structure and investment strategy to ensure that LGPS investments target growth locally and thus enhance local outcomes.
However, according to Fleming, challenges may arise when attempting to manage local investments in geographically diverse pools, as some pools have members spread out across economically and structurally disparate parts of England.
“It is reasonably straightforward for those pools whose members are contiguous, but in others, there are very different challenges in terms of local investments that would have a positive impact on those particular geographies,” she notes.
“We’re seeing an increased interest from LGPS, particularly in housing, where ideally, they would like the projects to be close to home if the financial returns are commensurate with a UK-wide investment. That makes sense, and we have found committees are very mindful that they shouldn’t compromise just because something is in their backyard does not mean that they should provide funding.”
What next for the LGPS?
Of course, the main hurdle is that the Pension Schemes Bill must pass before any of these changes become law. It remains to be seen whether some of the provisions may be tweaked as the bill moves through parliament, but LGPS stakeholders can expect a high degree of change.
One of the biggest concerns among these stakeholders is around the March 2026 deadline, and the impact on fiduciary duties.
There is also the reality that many other decisions may be put on hold as the changes resulting from the bill are implemented.
“Indications are that there will be an inevitable delay to other investment-related decisions, given the amount of work that needs to be done, particularly for those funds that need to find a new home but also with the process of moving legacy assets to the pool,” Fleming explains.
“For that timetable to be met, the main issue is ensuring that the pools are resourced well enough to be able to provide sufficient oversight for the legacy assets.”
She suggests that it is crucial to find a balanced approach to governance and oversight to avoid conflicts of interest in investment advice, amid a desire for bigger pools but also for local, small-scale investment.
“One concern is having the resources to deliver that, and the other is governance challenges around what is effectively fiduciary management”, she adds.
Fleming acknowledges that sourcing, originating and managing smaller deals is not something all pools have been able to do to date and has questions over how larger pools will achieve this “micro-local” investment.
“If you have mega-pools that do everything, are they genuinely going to have the resources and the capability to look for those smaller deals that will make a real difference in a locality?” she asks.
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