The Local Government Pension Scheme (LGPS) needs to take control of its future amid warnings an incoming government will be eyeing its financial clout.

Roger Phillips, chair of the LGPS Scheme Advisory Board for England and Wales, said the financial climate in the UK and the cost-of-living crisis had meant a spotlight had been turned on public sector schemes.

While he did not anticipate that a new administration would change the direction of pensions policy, he warned: “They will be interested in the money we hold and the way we use it.”

He added: “I have a concern to engage those in the leadership of the 86 funds in how we understand the momentum of change that is taking place and that we own it rather than letting others do it.

“We need good evidence and good data. They [the new government] will have a new mindset and will have finance at the top of their agenda. We need to own and understand that future agenda.”

The LGPS has found itself involved in government policy changes under successive Conservative governments, with the scheme involved in ‘levelling up’ investments and latterly in Mansion House-related projects.

Phillips was speaking at the opening session of the Pensions and Lifetime Savings Association’s (PLSA) Local Authority Conference.

Fellow panellist Joe Dabrowski, deputy director of policy at the PLSA, said: “We are in a really good strong position as a scheme but there is a lot to grapple with.”

The LGPS annual report
The session also saw the unveiling of the LGPS scheme-wide annual report for the 12 months ending 31 March 2023.

Total assets decreased by 2.6%, but Phillips highlighted that the period “was a challenging year for markets, including investment income”.

Total membership of the LGPS increased slightly during 2022/23, growing by 1.6% to 6.49 million members, compared to 6.39 million in 2022.

The number of active members increased by 0.6%, while the number of deferred pensioners rose by 0.2%.

Contribution income to the LGPS fell by £0.5 billion and was £0.9 billion lower than benefit payments. This “reflected the maturity of the schemes”, said Phillips.

Schemes reported positive cashflow overall of £2.07 billion. Total investment management costs were down £141 million, or 7.6%, as a result of a fall in performance fees.

Within this, management fees increased by £106 million, while other investment costs fell by £71 million.

Total administration and governance costs increased by £28 million, with administration costs increasing by £12.1 million, and oversight and governance costs increasing by £19.7 million.

Philips said 2022 was a “heavy year of mortality” with more deaths in the UK than had been expected under pre-pandemic projections.

The “other Elizabeth”
Phillips said the rise in active members belied the enormous pressures scheme members were under during the year the report was compiled.

“This was an incredibly difficult year,” added Phillips, citing the invasion of Ukraine and the death of Queen Elizabeth II as putting scheme investment performance under pressure.

“There was, of course, another Elizabeth, which we will choose to forget,” he quipped, a reference to Liz Truss’s short spell as prime minister, which included Kwasi Kwarteng’s “mini-budget” that led to significant volatility in government bond markets.

Infrastructure and private equity
The report also revealed a growing allocation to alternative investments among LGPS funds, including infrastructure and private equity. These two asset classes accounted for 6% each of total LGPS assets.

Allocation to infrastructure investments increased by 1.5% from £17.8 billion to £22.7 billion.

There was a drop in bond allocation to £44.1 billion or 12% of total assets, compared to £53.2 billion (15%) the year previously.

Phillips noted that the Mansion House reforms, which pushed schemes to invest more in private equity and productive finance, came out after the data on the report was compiled.

He pointed out that this showed the LGPS was already supporting UK investments before the Mansion House goals were announced.


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Published: June 13, 2024
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