Articles - Pension Schemes Bill a framework for the future of the LGPS

 By Michael Hayles, partner in the Pensions and lifetime savings team at UK law firm Burges Salmon
 
 Background
 Changes to the shape of the LGPS have been on the cards since before the new government took office in mid-2024 – for example, the previous Chancellor Jeremy Hunt had proposed that asset pooling, which had begun under George Osborne’s reign as Chancellor, should go further and faster, with all LGPS funds transferring their listed assets to their pool vehicles by March 2025. In November 2024 Rachel Reeves launched her own Mansion House reforms, which for the LGPS included proposals to accelerate and increase asset pooling, to set local investment objectives for funds and pools, and to implement a series of governance changes. You can read more details about the proposals, which were consulted on by MHCLG in the “Local Government Pension Scheme: Fit for the Future” consultation, in our November 2024 article.

 On 5 June 2025, the draft Pension Schemes Bill was published, setting out draft provisions to make extensive changes to the investment and governance arrangements of the LGPS. Alongside a roadmap setting out indicative timescales for the proposed reforms and the response to the Fit for the Future consultation (which had been issued the previous week), the provisions in the Bill give us a much clearer idea of the future shape of the LGPS – however, there is still a significant amount of detail to come.

 Overview
 The government’s response to “Fit for the Future” makes clear that, in most respects, it is proceeding with the reforms as outlined in the consultation document, though there are a few tweaks here and there. However, that’s not something you would readily understand from reading the draft Pension Schemes Bill. The provisions in the Bill set out a framework for the reforms but there is little meat on the bones yet when it comes to the details – these are all to follow in regulations. This isn’t an uncommon approach, with legislators tending to prefer to set out details in secondary legislation, which is more straightforward to amend in future in response to changing circumstances.

 However, in relation to the LGPS provisions in the draft Bill, many commentators have observed that the a number of the powers are unusually wide-ranging, and that, whilst the intentions of the current government as to how they are to be used might be clear from the consultation response, there is no telling what a future administration might wish to use those powers for.

 Speaking at a recent conference, Jeremy Hughes of the LGPS Scheme Advisory Board (SAB) called for guardrails to be set around how some of the broad powers in the Bill, for example to direct pools and funds to invest in certain ways, should be used. Whilst such guardrails might typically be found in regulations, given the breadth of the powers here, in this instance it might be helpful to include some parameters in the Bill itself. It may be that the Bill’s passage through Parliament may result in some improvements / clarifications as the powers the government is looking to afford itself are scrutinised in both houses.

 Asset pooling
 The first section of the provisions in the Bill for the LGPS deal with the pooling reforms, and in particular the requirement for the assets of LGPS funds to be managed by “asset pool companies”. “Asset pool companies” are defined in Clause 1 as being registered in England and Wales and “established to:

 (i) manage the funds and other assets for which its participating scheme managers are responsible, and
 (ii) make and manage investments on behalf of those scheme managers (whether directly or through one or more collective investment vehicles)

 There are a number of provisions in Clause 1 to allow the government to make regulations about asset pool companies in the LGPS – this includes a power under Clause 1(5) to make regulations requiring the asset pool company to obtain FCA authorisation. This was widely expected, having been proposed in the Fit for the Future consultation, and the response confirmed that the government would require pools “to be established as investment management companies authorised and regulated by the FCA, with the expertise and capacity to implement investment strategies”.

 On the ground a significant amount of work has already been happening in relation to this requirement. 5 of the 8 existing pools are already FCA authorised companies but still need to build up their in-house investment capability (which will be a requirement), the other 3 are structured differently and (where they continue – see below) would need to apply for FCA authorisation (a process that can typically take at least 18-24 months). As part of the November consultation, all 8 were invited to submit proposals to government, setting out how they would deliver the proposed pooling model, which the government is aiming to move to in March 2026. The proposals submitted by the Access and Brunel pension partnership pools were subsequently rejected by government, meaning that their participating funds have been invited to move all of their existing pooled assets to another pool (as well transferring their remaining assets into the new pool).

 Timing is an important consideration in relation to the asset pooling company provisions in Clause 1, with the pools being set an ambitious timetable to meet the proposed new pooling model by March 2026. According to the indicative timings in the roadmap, Royal Assent for the Bill is not expected Q1 2026 at the earliest, while it has been expressly stated in that document that any secondary legislation implementing the detail of the reforms will not be published until the Bill has Royal Assent.

 In addition, funds have been told they are required to transfer all their remaining legacy assets to their pools by March 2026. This means that they will be operating in something of a legal lull, having to effect the transfers under existing legislation while they wait for the law requiring them to do so to catch up. This may present some challenges for funds, particularly in relation to certain asset classes, such as unlisted and illiquid assets, where the costs of transferring may be significant and the necessary in-house investment capability within the pool not yet establishe

 The regulation making powers in Clause 1 are permissive – they are all framed as an ability to make regulations, rather than a requirement to do so – but the accompanying explanatory notes make the government’s intention clear, stating that the measures in the Bill will “require the Secretary of State to make regulations that oblige LGPS administering authorities to participate in an asset pool company, and that all LGPS investments must be managed by asset pool companies”. Clause 1(2) includes some examples of what the regulations might provide for. As well as the sort of powers we would expect to see (e.g. funds can only participate in one pool), there are also some more controversial examples of what the regulations might include, including:

 • an ability for the Secretary of State to prescribe that a fund participates in a specific pool (or indeed ceases to participate);
 • a power for the Secretary of State to direct an asset pool company “as to the manner in which it is to carry out any specified investment activities” or “requiring it to take, or not take, a specified decision in carrying out any specified investment management activities”

 These are some of the very broad powers in the Bill that have attracted early criticism as we mentioned above. The ability for the government to pass secondary legislation giving itself the power to direct how these very large asset pools manage their investments is a very significant one, as is the power to direct funds to participate in a specific pool. Whilst the current government might intend these as a backstop power only, we know that policy intentions can change over time, particularly if there is a change of administration.
  

 Asset management
 Clause 2 defines the respective roles of the fund and the pool when it comes to investment management. Again, it is in the form of a framework provision giving the power to make regulations setting out the detail. This time however the Bill is prescriptive, setting out that the regulations must include provision for securing that:

 • the scheme manager (i.e. the fund) formulates, publishes and keeps under review an investment strategy;
 • the fund’s assets are “properly” managed by the pool, “with a view to implementing the scheme manager’s investment strategy”; and
 • “the scheme managers co-operate with the strategic authorities to identify and develop appropriate investment opportunities”.

 There is detail to follow in regulations as regards to the level of detail the scheme manager will be able to prescribe in its investment strategy – this issue generated almost 200 consultation responses with a range of views represented. The government response indicates that it is the high-level investment objectives that will be prescribed by the funds, such as overall return and risk appetite. Decisions such as the split between active and passive investment management and how to generate sufficient income from investments to meet cashflow requirements will rest with the pool as these are considered to be matters of implementation rather than strategy. The response includes a template that the government will include in guidance for funds, requiring them to complete setting out their strategic asset allocations.

 Clause 2(3) goes on to provide that the regulations may also include requirements as to where the scheme manager gets its advice in formulating its investment strategy and matters that must or may be covered in it – examples given include approaches to responsible and local investments, and target ranges for growth and income. The consultation response indicates that the government will proceed with its proposal to require funds to take their principal investment advice from the pool so we would expect this to be specified in those subsequent regulations.

 In our November 2024 article on the consultation proposals we highlighted the inherent tension between the pool on the one hand acting as the investment manager for the fund, and, on the other, acting as its principal investment adviser. This was raised as a concern by a number of respondents to the consultation, and the government’s response seeks to address the issue, highlighting that in its view:

 • there is no conflict of interest in the pools advising on the investment strategies of partner administering authorities, because the pools are solely owned by LGPS administering authorities, exist to provide services in their interest, and do not stand to gain financially from the partner funds taking their advice nor from providing poor quality advice;
 • Pension Committee members having the appropriate ability and knowledge to hold their pools to account, and to challenge and test their advice, will be key;
 • the proposals “do not preclude administering authorities from taking advice from external sources ‘in exceptional circumstances’”.

 Examples given include where the pool (note, not the fund) wishes to seek specialist advice on a specific asset class, or to seek a second opinion. The key point, says the response, is that “these situations should be the exception, rather than the norm, given that pools are set-up to meet their shareholder’s needs and do not stand to benefit financially from poor quality advice”.

 The government is therefore satisfied that administering authorities will have access to the ‘proper advice’ needed to satisfy their fiduciary duty. A definition of “local investments” is included in Clause 2(5) which says this means, in relation to a scheme manager, “investments in, or for the benefit of persons living or working in” either that scheme manager’s area, or the areas of other scheme managers participating in the same pool.

 This is the first formulation of a “local investments” definition that has been proffered – the consultation sought views on the appropriate definition but did not propose one of its own. It is clear that a regional focus is intended – the response sets out that local investment should mean broadly local or regional to the fund or pool. However, with a shrinking number of pools (potentially down to 6 with 2 applications having been rejected as reported above), each will have an increasing geographic reach – will this potentially dilute the scope for impact investing “locally”? The consultation response promises that government will work with the SAB to develop guidance.

 Governance changes
 Clause 4 of the Bill sets out proposed governance changes. This includes a power allowing the Secretary of State to make regulations in relation to the LGPS in relation to carrying out “periodic or ad hoc governance reviews of individual scheme managers” (funds), issuing statutory guidance about carrying them out and how the government responds to the outcome. There is specific provision in Clause 4(3) for the first governance review period to include time before the commencement of such regulations.

 Clause 4(4) sets out a number of compulsory provisions for the governance review regulations to incorporate, including requirements that:

 • the review is undertaken independently but at the scheme manager’s own cost;
 • a report of the review is sent to the Secretary of State and the scheme manager; and
 • the scheme manager publishes the report.

 Again, the framework provisions in the Bill are something of the tip of the iceberg when it comes to the governance reforms the government is intending to make, being the only governance changes that require primary legislation. The consultation response confirms that, broadly, the government is proceeding with the changes outlined in the consultation proposals, which look to implement the SAB’s 2021 Good Governance recommendations. These include the appointment of a senior LGPS officer with overall delegated responsibility for the management and administration of the fund, and new requirements for knowledge and training for those involved in managing the fund. The aim is that the new governance framework will be in place for the 2026/27 scheme year.

 In relation to the governance review requirements, the consultation response indicates that the government will be working with both the SAB and the Pensions Regulator to develop the detail and will set that out in statutory guidance. Originally it had been proposed that the periodic reviews would take place once every two years but this has been amended to a triennial review in response to consultation feedback.

 Fund merger
 Clause 5 of the Bill is a short but controversial proposed amendment to the Public Service Pensions Act 2013 which would give the government the ability to make regulations giving it power to require LGPS funds to merge. The proposed power specifies that it includes compulsory merger, and can apply to combine two or more funds.

 The consultation response indicates the government envisages this power may be useful in relation to local government re-organisation. The response says that the government’s “strong preference” is that where mergers are needed they happen “by agreement” between administering authorities but that this power would allow them to intervene where “local decision making is not effective in bringing about satisfactory arrangements”. Although this is the example given in the consultation it is of course possible to envisage other situations where the power could be used – for example, might the governance review regulations include fund merger as a possible response to an unfavourable governance review report and a subsequent failure to remedy the defects?

 Touching briefly on the local government reorganisation, it is worth noting that the LGPS pooling and governance reforms are all happening at the same time as the wider review and reorganisation of local government. Moving billions of pounds worth of pension scheme assets is an expensive business and a holistic view of local authority and fund must be taken if government is to avoid running the risk of having to move assets more than once (incurring millions of pounds of costs in the process).

 Next steps
 The publication of the Bill is the first step along the road for reform of the investment and governance arrangements for the LGPS. As the Bill works its way through Parliament we expect to see the draft provisions closely scrutinised and we may see some amendments, as members of the respective Houses push for greater clarity in key areas. The workplace pensions roadmap document published alongside the Bill specifically confirm that secondary legislation will not be published until the Bill receives Royal Assent; however, the detailed consultation response gives us a clear picture of what to expect and we would expect consultation periods to be short when they arrive.