Tension at the heart of UK government pension reforms
Border to Coast Pensions Partnership is considering how to provide local investment opportunities for member funds in the North of England, as well as throughout the rest of the country (Unsplash/Fred Tromp)
The British government’s reforms of its $530bn local government pension scheme have been largely carried out with the intention of creating bigger pools of capital which can invest to grow the economy through injecting cash into private equity and infrastructure.
The model to replicate is often given as Canada’s Maple 8, many of which are large international investors operating in a manner not dissimilar to a private equity house.
But there is a fundamental tension at the heart of what the British government is trying to achieve because while on the one hand it is trying to create large investment powerhouses, it is also instructing the LGPS to invest locally.
This is one of the tensions that exists at the heart of the so-called ‘fit for the future’ reforms.
The British government has provided guidance on how LGPS pools should invest locally but, as some have pointed out, it is also somewhat vague.
Tony English, head of LGPS at Mercer, describes this as “flexibility”.
But he said: “This flexibility also introduces complexity from an implementation perspective and potentially introduces diseconomies of scale to the extent that partner funds choose differing local areas.
As it stands the guidance only says that local investment should take place within the area of the pool. Whether that should be at a regional level or a hyperlocal level is left unsaid and the pools are all taking slightly different approaches to this.
English said the requirement could be “a challenge” for some of the more dispersed pools if they were seeking to have one investment solution across the entire group.
Some pools, such as London CIV, have the advantage of being geographically cohesive, while others, such as Border to Coast Pensions Partnership, are less so.
Border to Coast, which after the reforms next month will manage $132bn, has to come up with a solution that appears aimed at keeping its members in the affluent London commuter belt of Surrey and in the former coal mining community of County Durham happy.
Perhaps understandably, they are taking a local approach.
A spokesperson said it would be largely a decision for the pension funds within Border to Coast. They will have a choice as to whether an investment is classed as local if it sits outside the fund’s geography but within the pool’s region.
The spokesperson said: “We are standing ready to action those strategies.”
LPPI, a pool that will include Cornwall and Lancashire, says it will be building “bespoke local investment sleeves”, which will generally focus on the fund’s immediate vicinity.
Of course the $66bn London CIV has a much easier time, since it covers the entirety of the capital city plus Buckinghamshire, just over the border.
Andrien Meyers, chief commercial officer at LCIV, said the pool was consulting its member funds to establish what sort of investments they’d want to make across the area.
“We are currently analysing the responses of that survey,” he said, with “two or three themes” already emerging, such as housing.
Meyers added that from a practical perspective, if member funds wanted to invest in certain themes then this would have to happen outside the physical geography of the capital.
He said: “If we want to invest in clean energy such as wind farms, then great we can do it but it obviously won’t be in London.”
Buckinghamshire’s decision to join the pool did not result in a change of approach, Meyers added. “It adds value for both the partner funds in London, but also for Buckinghamshire,” he said.
LGPS Central is going to construct one local investment proposition and chief executive Richard Law-Deeks said the pool, which will be over $132bn in size after the reforms, will aim to give “equality to all parts of the region”.
He said doing so would ultimately provide member funds with a greater level of diversification than if their local investments were solely in their area.
The government’s position is that it has no position. Speaking to AOX, pensions minister Torsten Bell said: “I think different people will definitely choose different approaches and that will depend on different pools and it will depend on what the [member fund] decides.
“Greater Manchester will still be able to say ‘we want to see X levels of local investment in Greater Manchester’. That’s a desired principle of these reforms, not a side effect.
“We are saying ‘these people should decide these things, and these people should do those things’. You do not want the pensions minister having a view on what the Greater Manchester [fund] should do and do differently within the pool”.
But in practice it seems few pools are offering a genuinely local option - one is exploring the possibility of bundling its member funds together on a regional basis so it can provide something similar to a local option without the granularity of having to build a large number of hyperlocal options.
Doing so would highlight one of the tensions at the heart of the reforms.
Helen Forrest Hall, chief strategy officer at the Pensions Management Institute, said: “Defining ‘local’ at the scale of a pool may work for geographically compact arrangements, but for multi‑region pools it becomes so broad that it risks losing meaning altogether.”
She pointed to Clause 2 of the reform, which places responsibility on administering authorities to set their own investment strategies while requiring all assets to be held by the pool.
“This creates a structural tension: individual authorities may have distinct local priorities, yet the pool cannot credibly commit to delivering bespoke local allocations for every participant,” she said.
“The core challenge is that local ambitions and pooled delivery do not always align, particularly where investable opportunities are unevenly distributed or sub‑scale.
“While local investment can play a valuable role where it meets fiduciary standards, the guidance does not acknowledge that pools will inevitably face constraints in sourcing, structuring, and scaling opportunities across diverse geographies.”
If these tensions cannot be resolved then something will have to give, and the question is what will be prioritised in resolving it: scale, efficiency and professional governance, or localism and investment decisions made as close to the member as possible.
Recent reforms have all trended towards the former.
