Following Rachel Reeves’ confirmation that the Pensions Schemes Bill will be signed into law “in the next few months”, we’ve taken a deeper look at what some of the changes mean for the Local Government Pension Scheme (LGPS). 

The Pension Schemes Bill introduces several new powers, building on the Government’s ‘Fit for Future’ consultation response, these include:  

• Clarity on its power to compel the merger of LGPSfunds; 
• The requirement for independent governance reviews; and  
• A helpful extension of the exemption to procure investment management services where those services are carried out by Asset Pool Companies.  

It also provides a mandate for the Secretary of State to direct how an Asset Pool Company can and can’t undertake investment management activities in specified circumstances. 

A Deeper Dive 

Compelling the merger of pension funds 

The new Bill envisions the implementation of further regulations that will give the Secretary of State the power to direct Scheme Managers to participate in an Asset Pool Company or to cease participating in an Asset Pool Company. 

Pensions UK (formerly PLSA) has already questioned the need for these new powers, recognising that these pooled funds already require highly specialised and local knowledge and that they should only be used as a last resort. 

The Bill also doesn’t provide any guidance on how the mergers should take place within such a tight timeline. It is not clear if thought has been given to how any disinvestment and reinvestment of a Scheme Employer in a pool is meant to take place within this timetable if they are compelled to merge with (and concurrently demerge from) existing pools independently, particularly as investment management agreements can contain long disinvestment periods to mitigate market volatility and ensure the best financial outcomes for members. 

Power to direct an Asset Pool Company  

The Bill provides that, in prescribed circumstances the Secretary of State may give a direction to an Asset Pool Company that may require it to: 

• comply with guidance; 

• carry out a specified investment management activity; or  

• not carry out a specified investment management decision. 

The exact nature and remit of this power is currently unclear, except in so far as it is a departure from the Secretary of State’s current remit over Scheme Employers to only provide a direction where it is satisfied a Scheme Employer is failing to comply with guidance1.  

It is uncertain if this is a deliberate departure, recognising the Government’s commitment to investing in UK infrastructure, or an unintended inch away from the independence of investment management. 

We await the underlying regulations for further clarity on this power and when it is expected to bite.  

Investment strategies 

The Bill requires Scheme Employers to formulate, publish and review their investment strategies. As part of their strategy, Scheme Employers will need to consider responsible investment and their approach to local investments.  

Helpfully, ‘local investments’ has been given clarity as meaning for the benefit of persons living or working in the Scheme Manager’s area, or the areas of the other scheme managers participating in the same Asset Pool Company as the Scheme Manager. 

Unhelpfully, LGPS pooling to date has evolved primarily along geographic lines with Scheme Employers merging naturally with local partners who share similar regional values, resources and functional commonalities. Scheme Employers who are compelled to integrate with other pools which are not geographically close to them, and with whom they may have had little to no interaction to date, may be forgiven for wanting greater clarity on how they are meant to satisfy their local investment mandate within a Pool that has no local connection to them.  

Here, Scheme Employers looking to move Pools both now and in the future may wish to seek guidance on the terms of their admission with particular regard to voting rights and the Pool’s local investment mandate to ensure they will be able to discharge their statutory obligations. 

Procurement exemption 

The Bill clarifies that the vertical procurement exemption will extend to Asset Pool Companies. This means that Scheme Employers will not need to procure the work the Asset Pool Companies do on their behalf, provided more than 80% of the Asset Pool Company’s investment management activities are carried out on behalf of the Scheme Employers (or other Asset Pool Companies). 

This exemption envisages that all Scheme Employers who participate in the pool will become contracting authorities and a parent undertaking in relation to the Asset Pool Company. 

Governance reviews 

The Bill introduces periodic and ad-hoc governance reviews of Scheme Managers, focusing on scheme administration performance and effectiveness. We are awaiting the underlying regulations to inform us how often the periodic reviews are expected to take place. 

Governance reviews will need to be carried out independently of the Scheme Manager, and a review report will need to be sent to the Secretary of State and published for public viewing. 

How Capsticks can help 

We understand the enormous pressure that Scheme Employers and Asset Pool Companies are currently under as they take on these mammoth changes in a very short period.  

It is hoped that greater certainty and clarity will come, but in the meantime, please get in touch with Kate Beech for any pensions related questions or concerns or Mary Mundy for any procurement matters.