What the Budget means for the LGPS

The LGPS will be brought into the scope of the government’s planned reporting requirements for UK assets as soon as next month, the chancellor announced today (6 March).

The requirements were announced over the weekend and build on the Mansion House reforms published last year.

In the Red Book – the Treasury document detailing the Budget’s measures and proposals – the government said it wanted to introduce new guidance on asset allocation reporting with effect from April 2024.

The full text says: “Revised annual reporting guidance will require LGPS funds to provide a summary of asset allocation, including UK equity investment, as well as provide greater clarity on progress of pooling, through a standardised data return, taking effect from April 2024.”

Iain Campbell, head of LGPS investment at Hymans Robertson, said the focus on UK equities “raised some eyebrows” as it appeared to signal a shift in what the government wants to achieve with the Mansion House reforms.

“Previously, the focus has been on ‘venture and growth capital’ and ‘productive finance’, so further clarity will be needed on what exactly, will be defined as UK equities, and whether this is just one of a number of UK asset classes that will need to be reported on,” Campbell said.

“It was also surprising to see the government state that stricter rules may be brought in if the reporting requirements do not lead to increased investments in UK equity. Great efforts have been made to diversify investments globally, opening up a larger investment opportunity set, and any reversal of this could well create a challenge to fiduciary duty.”

Steven Leigh, associate partner at Aon, said: “The government appears to be taking a ‘what gets measured, gets done’ approach to encourage more investment from pension schemes in UK equities.

“A significant obstacle to this is that UK listed companies now only make up around 4% of the global market. Therefore, pension schemes that are overweight in UK are taking an implicit bet with savers’ money that the UK will outperform other markets.”

Leigh said this had not been the case in recent years: the FTSE All Share index added approximately 7% a year on average over the last 20 years, he said, compared to 10.5% a year from the MSCI All Companies World index.

“It may be that greater investment from pension schemes in the UK would result in improvements in the performance of UK companies, but it is likely to take stronger measures than new reporting rules to make this a reality,” Leigh added.

Investing in children’s homes
The Budget document also stated that the government would work with the LGPS “to consider the role [it] could play in unlocking investment in new children’s homes”.

The statement – tucked away on page 74 of the main Budget document – formed part of a package to put more money into children’s homes. The government said it would commit £45 million “match funding” to local authorities to help build 200 open children’s home placements, as well as £120 million to finance the maintenance and refurbishment of two existing homes.

Hymans Robertson’s Campbell said the proposal was “somewhat of a surprise”. The policy was likely part of the government’s “levelling up” agenda “albeit it on a somewhat more focused issue”, he said.

“Given the purpose of the LGPS and the fiduciary duty of pensions committees, this must be done in a way that stacks up financially for the LGPS – the risk-adjusted returns must be acceptable, and the governance requirements cannot be too burdensome,” Cambell added. “We must always remember that the LGPS is there to pay benefits, not to make up government spending shortfalls.”