UK government responds to 'fit for the future' consultation for the Local Government Pension Scheme

The UK government has published its response to the "fit for the future" consultation that confirms its plans to reform the Local Government Pension Scheme (LGPS). The response has important implications for administering authorities and the LGPS asset pools.

With the reforms due to be included in the Pension Schemes Bill 2025, which is expected this summer, administering authorities need to consider how the changes will affect their fund and what steps to take to ensure compliance within the proposed timeframes.

Reducing the number of pools

Currently, the 86 administering authorities in England and Wales manage their LGPS fund assets through eight asset pools.

After considering the pooling proposals it received earlier this year, the government has expressed support for maintaining six of the eight pools. It has invited administering authorities from two pools (Brunel and ACCESS) to engage with the other six pools to determine which they wish to form a new partnership with. It has also said it will take a reserve power in the Pension Schemes Bill to direct an administering authority to participate in a specific pool. The government does not intend to reduce the number of pools to less than six.

Asset pooling requirements

Administering authorities will be required:

• to delegate the implementation of their investment strategy to their pool;
• to take their principal investment advice from their pool; and
• to transfer all assets to the management of their pool.

All pools will need to be established as investment management companies that are authorised and regulated by the Financial Conduct Authority. They will also need to be able to carry out due diligence on local and regional investments and to manage those investments.

The minimum standards for pooling will be included in the Pension Schemes Bill.

Deadline of 31 March 2026

The government has confirmed a deadline of 31 March 2026 to meet the asset pooling requirements. For those administering authorities that need a new asset pool, the government expects the deadline to be adhered to as closely as possible, with an aim to have shareholder agreements in place by March 2026.

Concerns regarding Stamp Duty Land Tax have been acknowledged and tax officials will engage with pools shortly to discuss this in further detail.

To allow pools to satisfy the requirements of the Procurement Act 2023, procurement exemptions will be included in the Pension Schemes Bill.

Local investment

Proposals to require administering authorities to set out their approach to local investment will proceed, with some changes.

Administering authorities will need to set a target range for investment in their investment strategy statement and the pools will need to report annually on the impact of local investments. Pools and administering authorities will need to work with strategic authorities (or corporate joint committees in Wales) to identify local and regional investment opportunities, with due diligence to be conducted by the pools. Such local investment could include affordable housing, clean energy, physical and digital infrastructure, as well as support for new and established local enterprises, which can deliver positive local impacts, as well as financial return.

They will also need to work with local authorities, regional mayors and their strategic authorities (and Welsh authorities) to ensure collaboration on local growth plans including infrastructure projects. The National Wealth Fund will collaborate with the LGPS to address access to finance gaps and support strategic objectives on growth and clean energy.

Governance reforms

The enhanced governance reforms, based on the 2021 Good Governance Review conducted by the Scheme Advisory Board, will also proceed subject to a few amendments.

Importantly, this will require the appointment of a senior LGPS officer with delegated responsibility for the management and administration of the LGPS fund. There will also be a requirement for an administration strategy, changes to the way in which strategies are published and requirements as to the appropriate level of knowledge and understanding required for pension committee members and other officers.

Instead of a requirement that each administering authority's pension committee include an independent member who is a pensions sector professional, either as a voting member or in an advisory capacity, there will be a requirement that the independent member act as an independent adviser to the pensions committee only.

The government's response does not impose a single model for how shareholders or scheme members will be represented in their pool’s governance. Each LGPS fund and pool will need to consider the governance structure that best meets the needs of their shareholders and scheme members.

It will be necessary to complete an independent governance review every three years instead of every two years, with additional flexibility if needed. The Pension Schemes Bill will include this requirement, with other governance reforms being implemented under existing powers.

Merger of LGPS funds

The government will make legislative provision to allow for the merger, including compulsory merger, of LGPS funds, which may be required as part of local government reorganisation changes.

Osborne Clarke comment

Administering authorities and their asset pools will need to consider carefully the details of the LGPS reform proposals, including the upcoming changes to pooling, investment and governance. Further detail regarding the proposals will be included in the Pension Schemes Bill due this summer.

Administering authorities that currently work with Brunel or ACCESS pools will need to consider their next steps quickly. This urgency is in light of the government's request that those administering authorities provide an in-principle decision between themselves and their new pool by 30 September 2025.

All administering authorities will need to take steps to meet the new asset pooling requirements, including transferring their assets to the pools by 31 March 2026 (subject to some potential flexibility on that deadline for those that are moving pools.

Administering authorities will also need to give serious consideration to the local investment and governance proposals to start working out how they will comply. This will likely involve considering where policies or processes are already in place, and what gaps or additional steps are needed to meet and evidence compliance. Administering authorities should seek legal and investment advice, to ensure they are able to prepare for and implement these investment reforms in line with any legislation in the future.

These LGPS reforms are just one part of the UK chancellor Rachel Reeves' recent proposals to target pension fund assets to unlock capital to deliver the economic growth the government needs. The related final report on phase one of the government's pensions review and response to its recent DC consultation, together with the response to the "Options for Defined Benefit schemes" consultation form part of the same picture. This will include a much needed boost for UK infrastructure projects and local businesses.

The government certainly has a lot in its "pensions in tray" (including delivering the Pension Schemes Bill this summer), and does not seem to be shirking the challenge of delivering its goal of improving member outcomes and at the same time boosting UK growth. Time will only tell if it can achieve its goal.