Lessons from DC pensions for the LGPS pools

Published: September 16, 2025

Written By:

Gareth Doyle
Principal and Senior Investment Consultant
Barnett Waddingham

In the first of our new series hearing from experts outside the LGPS world, Barnett Waddingham explores how the defined contribution pensions sector’s decade-long journey through regulatory reform offers valuable lessons for LGPS pools facing similar governance pressures

With contributions from Peter Daniels, Partner and Head of Fiduciary Manager Evaluation, Barnett Waddingham and David Moreton, Partner and Senior Investment Consultant, Barnett Waddingham.

The LGPS has long operated under intense scrutiny – navigating complex reforms, political pressures, and structural change. As the sector faces a fresh wave of regulatory and policy shifts, there are striking parallels with the journey the DC pensions market has taken over the past decade and, as large asset owners, the pressures they currently face.

In the DC sector, regulatory interventions have been driven by concerns over governance, evidencing value for money (VfM), consolidation, investing in the UK, and a sharper focus on member outcomes. These same forces are converging on the LGPS, and there may be value in looking back at DC’s journey to anticipate what may lie ahead for the LGPS.

Master Trusts: A crystal ball for LGPS

Master Trusts are overseen by The Pensions Regulator, where investment oversight was historically less far reaching. This oversight gradually evolved to be a continuous, discussion-based relationship, where providers are required to clearly explain the merits of their respective investment strategies in terms of member outcomes. Alongside this ongoing dialogue, schemes are required to publicly evidence their governance, trustee capabilities, and long-term sustainability. This puts them in a similar position to the LGPS in this regard.

Although it is a positive step for members and permits external scrutiny, it has resulted in a material workload for Master Trusts – with Freedom of Information requests and pressure from advocacy groups creating greater alignment with the LGPS.

While the LGPS operates under a different framework, expectations are converging. Pools are increasingly expected to demonstrate investment beliefs, governance structures, transparent reporting, and alignment with public value and long-term resilience.

Strong investment stewardship isn’t just about compliance – it’s about building trust, defending local decision-making, and demonstrating long-term value to members and taxpayers. All of which requires a robust oversight model. The LGPS should brace itself for the potential of a more direct, yet “fluid”, relationship with government and the regulator. With that will come additional costs, the potential for league tables and external benchmarking relative to other large scale asset owners.

Key takeaway: Oversight is not a box-ticking exercise; it is a platform for defending local decision-making and public trust.

The cultural shift: From compliance to proactive governance

One of the most important lessons from DC is that regulatory change demands a cultural shift, and not just a compliance response. DC schemes learned – often the hard way – that data transparency and reporting requirements escalate quickly once regulators start scrutinising outcomes.

In DC, the most successful schemes (i.e. those perceived to be delivering strong member outcomes, robust governance, and long-term value) didn’t just react to new requirements, but proactively implemented enhancements above and beyond what was necessary.

While LGPS reforms take shape from 2026, the broader lesson is about building resilience and adaptability over time – not just meeting the next deadline. Building expertise to anticipate evolving expectations, rather than scrambling to catch up, will be key to maintaining local autonomy and delivering long-term value to members.

Similarly, continued investment in robust data systems, transparent reporting frameworks, and clear communications will be crucial. Thereafter, success may quickly evolve towards articulating the public value story to stakeholders.

Key takeaway: Anticipate and plan accordingly

Has additional governance helped in DC?

Master Trusts are now required to have independent trustee boards with a clear duty to act in members’ best interests. The most effective schemes combine strong trustee expertise with clear delegation, robust oversight of service providers, and a culture of continuous improvement.

Key strengths include:

Independent, skilled trustees with access to specialist advice
Clear separation between governance and operations
Regular performance reviews and transparent reporting

However, pitfalls include:

Over-reliance on historically appointed, in-house, or preferred providers without sufficient challenge
Governance structures that are too passive or lack diversity of thought
Failure to adapt as scale and complexity grow

Increased governance in DC has been beneficial, but it has shined a light on the stark differences between the best and the worst run schemes – with the latter coerced into consolidation.

Key takeaway: Alignment of purpose and an environment where challenge is supported is the key to success

What about VfM specifically?

In DC, well-intentioned policies – including the (0.75% p.a.) charge cap – had the unintended consequence of narrowing innovation. Alongside this, DC providers, with their commercial focus, gravitated toward low-cost, plain-vanilla investment solutions to avoid compliance risks, even where more complex strategies might have led to better member outcomes.

Even now, when considering the investment options offered by Master Trusts, decision makers often struggle to look beyond appointing the cheapest investment solution.

Having acknowledged the flaws in its cost focus, the new Pensions Bill expands the extent of VfM in DC, and is trying to change the focus towards continuously improving member outcomes and long-term sustainability.

Similar pressures are emerging for the LGPS. Notably, the Bill grants the Secretary of State powers to direct LGPS funds to join or leave pools and to intervene in pool operations under “prescribed circumstances.” This marks a clear shift from a model of local autonomy to greater centralised oversight.

When considered from the viewpoint of the LGPS, VfM would likely mean ensuring that investment performance, governance, and administration all contribute to keeping employer and member contribution rates stable and affordable over time.

Efficient use of scale, strong oversight, and transparent cost control are essential – not only to meet regulatory expectations, but to protect the long-term health of the scheme and its ability to deliver promised benefits.

As with DC VfM and the consolidation it helped prompt, there may be a temptation for commentators to mistakenly focus on cost savings. Should that happen, there is the potential for a land-grab and a resultant race to the bottom.

Key takeaway: Pooling needs to bring both cost savings and, through wider expertise, greater opportunities to enhance returns

UK productive finance

Having removed a range of historical barriers including liquidity, fee sensitivity and regulatory caution, DC schemes are now being “nudged” toward UK-focused productive finance.

As the government pushes for stronger alignment between pension capital and national growth priorities, the new VfM framework is increasing pressure on DC schemes to demonstrate UK impact, rather than just returns.

The Mansion House Accord, signed by 17 major providers, commits Master Trusts to allocate at least 10% of default investment funds to private markets by 2030, with 5% directed to UK assets.

Although a voluntary agreement, the threat of government mandation looms on the horizon.

The LGPS, with its long-term horizon and substantial scale, is arguably better placed to lead in UK productive finance. However, with new powers allowing central government to influence investment approaches, there is a similar tension between national policy goals and fiduciary duty to members.

As with DC, the LGPS must ensure an investment strategy, and make sure that local investment does not devolve into a tick-box exercise. Pools should question what they can do to have the biggest positive impact locally.

Policy advocacy within Master Trusts allowed them to set up dedicated policy research teams to document and evidence what matters most to stakeholders – beyond achieving the required levels of investment returns. Pre-emptively taking this approach may put the LGPS funds on a firm footing.

Documenting clear investment beliefs, particularly around UK (or regional) investments, will be critical to balancing national policy objectives with fiduciary responsibilities. A robust governance framework, capable of evidencing alignment with both stakeholder interests and policy intent, will be key.

Key takeaway: Focus on the productive aspect and not just the regional one.

Internal vs outsourcing

Even the largest Master Trusts (c.£50 billion) outsource investment management rather than solely in-house, but why?

Accessing specialist expertise, global asset classes, and sophisticated risk tools often require scale and infrastructure more efficiently delivered by external managers.

Passive investing in-house is typically inefficient given the scale of large asset managers, whilst active investing is nuanced by provider. Growing scale might suggest an increased appetite for in-house management.

But, with a significant increase in the scale of pools on the horizon, the question of how do they recruit and retain the best people becomes even more relevant? Moreover, what happens when an in-house team continues to underperform? Replacing in-house resources is harder than replacing an outsourced mandate.

This model of (primarily) outsourcing in Master Trusts allows trustees to focus on strategic oversight.

A vital part of the future governance frameworks will be robust and professionalised investment oversight functions.

The corporate DB sector has seen a rapid expansion in the provision of investment oversight services in recent years, on the back of increased delegation to fiduciary management and OCIO providers. There will be many parallels with what is needed for the LGPS.

Increased delegation (to pools) creates the potential for conflicts of interest, even where overall intentions are positive and aligned. At its very simplest, we cannot expect pools to report completely impartially on their own investment performance.

Frameworks will need to be established to help the LGPS assess the impact of investment decision-making by the pools, for example whether active management has provider outperformance (or “alpha”) across different asset classes.

Isolating the different areas of decision-making and providing quantitative and qualitative assessments is a key part of the oversight function, in addition to bringing focus back to the performance of mandates against their goals as a whole.

We envisage development in peer group performance comparisons, potentially enabling comparisons of performance across LGPS pools.

Another important part of oversight is acting as a catalyst for debate. It’s important that the LGPS understands activity and performance in their portfolios – to do so, it requires the pool and its managers to be held to account with their decision making.

In other words, oversight is more than just performance evaluation, it involves independent challenge and scrutiny.

But to what end if it is not expected that LGPS will actively change their pool membership because of investment performance? The answer lies in driving high industry standards of accountability and ensuring value for money for LGPS funds, and its stakeholders.

Key takeaway: As experience grows, in-house teams may be able to offer more sophisticated solutions. Oversight will ensure they have evidence that they can walk before they run.

The case for consolidation

Over the last five years, DC’s burdensome governance has incentivised thousands of schemes to merge into 25+ large Master Trusts.

This has delivered benefits – lower costs, improved governance, and access to more sophisticated investment strategies.

Consolidation also brought challenges – maintaining member focus, managing operational complexity, and ensuring that scale doesn’t dilute accountability.

Although larger Master Trusts have received feedback about their limited innovation (relative to smaller peers); they have maintained a laser focus on improving operational resilience – particularly in terms of protecting vulnerable members.

Surprisingly, Master Trusts have yet to positively impact on member engagement – with small Trust-based schemes evidencing better engagement on simple member governance, like Expression of Wish forms.

Similarly, larger Master Trusts have shown limited evidence that size consistently delivers the “best” investment returns. With greater focus on value, and the ability to access illiquid assets, that could change, but there are no guarantees.

Pooling may have already delivered scale and efficiency gains in LGPS, but the DC experience shows that initial consolidation may not be at an end. Recent DC consultations and government announcements question what the minimum size of a Master Trust should be (£25 billion by 2030), and subsequently how few “superfunds” will then remain.

Continued DC consolidation could further drive efficiency, but at what cost? Is pushing for an oligopoly likely to be in the member’s interests, when previous interventions may have inadvertently resulted in reduced innovation, a declining member experience and poorer member outcomes?

Along with proactively demonstrating their governance credentials, LGPS pools need to balance efficiency gains with local accountability, closer collaboration with peers, transparency, evidencing innovation, and a compelling story on how stakeholder value continues to be improved.

Key takeaway: Scale does guarantee the best outcomes, but it can amplify impact through innovation and alignment of stakeholders.

Closing thoughts

Between them, the LGPS and Master Trusts will provide retirement income for a significant proportion of the UK’s population.

The LGPS has distinct characteristics and strengths compared to DC, but the parallel direction of travel is clear: the threat of external intervention, increased governance, and a stronger demand for demonstrable value to members and taxpayers alike.

The DC experience shows schemes that approach these challenges as an opportunity for strategic enhancement and transparency – rather than just compliance – tend to come out stronger and minimise the loss of local control.

Without this well-rounded story, the focus will inevitably fall on cost vs. returns – at which point there will always be a best and worst performer.

Further reading
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