IPE UK Briefing: Consolidating LGPS assets and DC funds into 'megafunds'

The UK’s chancellor of the exchequer, Rachel Reeves, has used her first annual policy statement known as Mansion House Speech on 14 November to propose merging Local Government Pension Scheme (LGPS) assets and consolidating defined contribution (DC) schemes into ’megafunds’ to unlock £80bn of investment for infrastructure projects and businesses of the future.

The reforms are expected to be introduced through a new Pension Schemes Bill next year, and will create so-called ’megafunds’ by consolidating DC schemes and pooling assets from the 86 separate UK local authorities’ pension funds.

Under the proposals LGPS funds will manage assets worth around £500bn by 2030. These assets are currently split across 86 different administering authorities, managing assets between £300m and £30bn, with local government officials and councillors managing each fund – many of which use the UK’s existing eight investment pools.

The ‘megafunds’ will be authorised by the Financial Conduct Authority (FCA) and the government said the governance of local schemes will also be overhauled to deliver better value from investment decisions.

A new independent review process will be established to ensure each of the 86 administering authorities is fit for purpose.

For DC schemes, the government will consult on setting a minimum size requirement to ensure they deliver on their investment potential.

It will also consult on measures to facilitate this consolidation into ‘megafunds’, including legislating to allow fund managers to more easily move savers from underperforming schemes to ones that deliver higher returns for them.

British Growth Partnership

The government also announced that Aegon UK and NatWest Cushon are committing to work with the British Business Bank on the launch of the British Growth Partnership.

The British Business Bank will establish the British Growth Partnership, subject to regulatory approval, encouraging more UK pension fund investment into the UK’s fastest growing, most innovative companies.

The initial fund will seek to raise hundreds of millions of pounds, including a commitment from the British Business Bank, to invest in some of the highest potential opportunities in the Bank’s venture capital pipeline.

Innovation in BPA market

M&G launched a Value Share Bulk Purchase Annuity (BPA) proposition by completing a £500m (€599m) transaction with a private corporate sponsor and its UK pension scheme, insuring around 3,200 pensioners and deferred members.

The proposition is an alternative to a traditional buy-in – its structure allows trustees to insure scheme members in exactly the same way as a traditional buy-in transaction, continuing to place members’ security at the heart of the transaction, while also allowing corporate sponsors to participate in the risk and reward generated from insuring their scheme.

With many schemes considering their preferred endgame and weighing the merits of maintaining access to an anticipated emerging surplus against the risks associated with not settling, there will be many cases where trustees and sponsors have different views.

The proposition was welcomed by consultants for offering a solution that balances the needs of both the members and the sponsor, providing members with the high level of security associated with a traditional buy-in.

Items to note:

• The Environment Agency Pension Fund (EAPF) was named European Pension Fund of the Year at tthis week’s IPE Awards 2024 ceremony in Prague. The pension fund, which is part of the UK’s Local Government Pension Scheme (LGPS), has also bagged the leading pension fund award for the UK.

Pamela Kokoszka

UK Correspondent