Will Scotland remain independent of England’s pension reform agenda?
So far the Scottish government has not issued a pooling mandate, but whether the UK government’s pension reform agenda fails to make it north of the border remains to be seen (Reuters/Toby Melville)
Eleven local government pension schemes. 638,558 combined members. £67.8bn in assets. From heavyweight Strathclyde, with £32.1bn under management, to the humbler £529mn Orkney Islands scheme, the Scottish LGPS landscape remains unconsolidated - for now.
But while John Swinney’s government has issued no pooling mandate, the rest of the UK’s pension reform agenda has Scottish schemes paying attention.
The structure of the Scottish LGPS has been the subject of discussion for at least 10 years.
“That discussion has looked at whether there should be more cooperation between the 11 Scottish funds, whether there should be pooling, [and] whether there should be a merge into one or more groups of funds,” Simon Watson, joint secretary to the Scottish LGPS Advisory Board, tells AOX.
The government’s party line? No consolidation right now. Yet according to Watson, Scottish ministers have asked Westminster in its Pension Schemes Act for the same reserve power that applies to England: the ability to mandate funds to pool or merge in future.
This month, a possible Lothian-Falkirk merger originally agreed in 2021 was canned until at least after next year’s elections in anticipation of the Scottish government’s next move.
“I’m not sure the… merge was sensible,” says Mandy Watt, pensions committee convener for the £10.3bn Lothian scheme. “At the moment there’s not really any structure for merged LGPS. That’s why we’re waiting to see what changes the Scottish government makes, given the changes that are happening in England.”
According to committee meeting documents, Lothian believes there is a “reasonable expectation that [the Scottish government] will consider reform after the elections in 2027”.
But in the meantime, everything remains on hold.
On the whole, the Scottish schemes are not keen on the idea of mandated consolidation.
Strathclyde, the largest among them, is “dead set against” it, says David Parker, chair of the £994mn Scottish Borders pension fund committee.
Strathclyde head of pensions Richard McIndoe told AOX such a reform would be "disruptive and potentially counterproductive, with little if anything for us to gain”.
And with a scheme the size of Strathclyde in play, representing almost half the combined LGPS assets in Scotland, smaller funds are nervous about the possibility of being superseded by “their ball, their game, their rules,” says Tony Caleary, chair of the £3.6bn Falkirk pension scheme board.
“I’m worried about local accountability when it comes to pooling,” he says. “For example, in Falkirk, you have the petrochemical base in Grangemouth… so we can’t just say no to fossil fuels.”
The good news? A sweeping pooling mandate is unlikely, at least for now, according to Parker.
“The Scottish government doesn't entirely agree with the reform happening in England and Wales,” he says. And with all 11 Scottish schemes currently in surplus and administration costs and employer contributions coming down, there is simply “no drive” for change of that kind.
The Scottish government is instead looking for “a more focused effort on the Scottish economy”, according to Parker.
“I think there will be pressure for local infrastructure projects, possibly sooner than pooling,” Caleary agrees.
Local investment is one of the champion themes of the UK consolidation agenda, and equally a priority for the Scottish government. SAB was recently commissioned to survey how much Scottish LGPS money is invested in Scotland, with the results rather conspicuously showing figures “in the low single digits”, according to Watson.
Instead of faffing around with scheme mergers, Parker insists, “if we start to focus on Scotland now in the structures we’ve got, we can do more”. The challenge will be to uphold the pension schemes’ fiduciary duty to their members at the same time.
Pooled funds could be an option, with each of the 11 LGPS contributing to shared vehicles with focuses in areas such as housing, climate transition, private equity and infrastructure. According to Parker, this idea will be a big feature of discussions over the next six to eight months.
In fact, it might be to invest locally or merge, he says: “In the next couple of years, if Scottish schemes haven’t collaborated more and demonstrated more [investment] in the Scottish economy, the government might rethink reorganisation.”
Whether that threat remains implicit or becomes explicit, only time will tell.
Consolidation is certainly having its way south of the border, where the Access and Brunel LGPS pools have recently been axed in favour of fewer, larger vehicles. Whether the same fate will befall the Scottish schemes will depend on whether they can do enough - through creative collaboration and local investment - to dissuade this government or the next from flexing its mandation muscles.
“There’s sort of an expectation that where England goes, Scotland has a tendency to follow,” says David Dempsey, pensions committee convener of the £3.8bn Fife scheme. “Though with the Scottish government, you never know - it can cut both ways.”