UK government set ambitious expectations for local government pension schemes

As part of its continuing pensions investment review, the UK government recently launched a new consultation on how to unlock the investment potential of the £392 billion LGPS in England and Wales. The government’s aims for LGPS pools have set requirements and timescales.

One significant aspect is an expectation for LGPS to make use of Financial Conduct Authority (FCA) authorised and regulated investment management companies. This measure is intended to ensure that pension funds are managed by firms that adhere to the highest standards of conduct and regulatory compliance.

Since 2015, the 86 administering authorities in England and Wales (‘partner funds’) have been proceeding towards managing their investments through eight LGPS asset pools. Already, the LGPS pools have reported delivery of net savings of £870 million against total costs of £675 million – mainly through lower fees, enhanced investment opportunities and improved efficiencies.

Strategies on the form of LGPS pools vary, with five LGPS pools using stand-alone FCA authorised investment management companies, two using an outsourced arrangement that relies on external service providers, and one using an approach in which a joint committee provides oversight, but the partner funds retain management of most assets.

The UK government’s view is that LGPS pools using FCA-authorised investment management companies have clear advantages over other forms since they provide in-house expertise and capacity on a non-profit basis.

“FCA authorisation and supervision also provides assurance to partner funds that the LGPS pool’s company is properly managed and able to provide regulated investment activities,” said Elaine MacGregor, investment funds expert at Pinsent Masons.

The UK government is now consulting on a requirement that, by March 2026, all LGPS pools will have an FCA-authorised investment management company with sufficient expertise and capacity to implement investment strategies. However, “this proposal does pose a challenge for each LGPS pool,” said MacGregor.

While they are much further along in the journey to meet this proposal, the five LGPS pools using an FCA-authorised company may still need to formulate new capabilities and expertise in order to meet all of the government’s recommendations, including provision of advice on asset allocation. More demanding still, those three LGPS pools which had adopted other models will need to make decisions as to whether to establish a new FCA authorised investment management company or to instead merge with, or become a client of, one of the five pools which already have such a company.

MacGregor said: “Should a LGPS pool wish to establish its own FCA-authorised investment management company, the March 2026 deadline makes this option very challenging indeed unless this process is already well underway. The most likely outcome could therefore be further consolidation into fewer LGPS pools which already meet this requirement.”

Responses from LGPS pools and partners funds to this consultation are due early next year.  The UK government may use the upcoming Pension Schemes Bill to introduce any primary legislation which may be required to implement these proposals.