LGPS: A national treasure kept under wraps

The Local Government Pension Scheme is a national treasure. Literally.

With a whopping £337bn of assets (as of March 2021) it is one of the largest defined benefit (DB) schemes in the world.

To put that into perspective, if the LGPS was a country it would be bigger than Argentina, Israel or Ireland.

The LGPS is also the largest DB scheme in England and Wales, with 18,900 employers and 6.1m members.

On average it provides an LGPS pensioner – typically a retired local council worker – with an annual income of around £5,000, which for millions is a hugely helpful top-up to their state pension.

“For our members it makes the difference between a dignified retirement and just existing,” a senior LGPS official once told me.

But the purpose of the LGPS these days goes beyond ensuring its members and their dependents can at least enjoy their golden years in a modicum of comfort.

Its sheer size and scale also means the LGPS can play an important role in driving sustainable investment in sectors like infrastructure and, increasingly, engagement on issues like climate change.

This was the big idea behind ‘pooling’, whereby 89 administering local authorities would consolidate into half a dozen or so investment pools with assets of at least £25bn each. Savings achieved through economies of scale and increased bargaining power would drive down investment costs, for the benefit of scheme members.

It’s five years since the pooling initiative was launched. So far, results have been mixed.

On the plus-side, the eight newly-formed pools rightly highlight their success in reducing their own costs.  For its part the Government estimates  that pooling will have saved a total of £900m by 2023, “largely from lower investment custody costs, due to greater scale”.

But fears are growing  that competition between LGPS pools could inflate the cost of investing in infrastructure assets like renewable energy, driving up prices. As Roger Phillips, chair of the LGPS Advisory Board puts it: “There are only so many vehicles out there to invest in.”

Of course, the obvious solution would be greater co-operation and co-ordination between pools, ultimately leading to further consolidation, cost savings and investment clout.

So far, though, the LGPS has shown little appetite to go down this route. Each investment pool would rather focus on their own performance than talk about the benefits of even greater scale.

This is a shame. Unlike Norway,  another once oil-rich country, the UK’s singular failure to produce its own sovereign wealth fund champion will only hamper efforts to hold portfolio companies to account on climate change.

The LGPS could be that champion. It could be an even greater force for good but for now at least that potential remains unfulfilled.

A national treasure is being kept under wraps.

Data sources:

https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1042530/LGPS_England_and_Wales_2020-21_revised.pdf

https://databank.worldbank.org/data/download/GDP.pdf