Ministerial letter to LGPS funds: asset pooling and further efficiencies 

Teresa Clay

Head of Local Government Pensions

Ministry of Housing, Communities and Local Government

17 July 2024

Subject: Ministerial Letter to LGPS Funds in England (Asset Pooling and Further Efficiencies)

Dear Teresa

We write further to the letter sent by the previous Local Government Minister, Simon Hoare MP to LGPS Funds in England on 15 May 2024, regarding asset pooling and the potential for further efficiencies within the LGPS. We note the strong encouragement from the Scheme Advisory Board (SAB) for Funds to respond to the letter despite the change in Government, should the new Minister wish to consider the responses when developing MHCLG’s future strategy for the LGPS.

Although we appreciate the letter is addressed to S151 Officers and Committee Chairs and not intended as a broader consultation, Mercer is a long-established partner with LGPS Funds across investment, funding and governance, and aligned to Mercer’s wider responsibility as a professional consultancy firm, we feel duty bound to set out our thoughts in relation to the themes being considered.

Overall, we believe there are opportunities to explore further collaboration across LGPS Funds as the pension landscape changes by setting clear and realistic long-term objectives, promoting innovation and aiming to raise standards. 

However, a critical first step to delivering a successful outcome, will be to leverage off the lessons learned when smaller scale consolidation/mergers have taken place and to listen to those on the ground – the Fund officers, committees and other key stakeholders - as to where change will deliver most value whilst retaining an open mind to the challenges. Without this, the LGPS risks becoming penny-wise and pound-foolish whilst risking unnecessary upheaval for Fund Officers who are already extremely stretched. 

There are quick wins that can be tackled now whilst the bigger goal is being properly worked through. These include the implementation of the SAB’s Good Governance recommendations as soon as practicable (we understand regulations have been drafted and are ready for consultation?) and responding to the consultation on climate change risk management – which will reduce risk, cost and improve outcomes. 

As commented by SAB, we also welcome an open discussion about the possible benefits – and limitations – of scale, and the role of local accountability in the management of risks. 

It should also be noted that:

• successful collaboration across Funds already takes place and helps to achieve greater efficiencies and productivity in the sector. This goes beyond the investment pools, mergers, shared service models and includes the work undertaken by local pension officer groups and the various sub-committee and working groups that operate on a national level, alongside central bodies. 
• collaboration and consolidation aren’t necessarily always about savings – but can also be used to reduce risk and increase performance and productivity. 
• transitional costs and risks need careful consideration and should not be under-estimated. A desire for greater efficiencies in the longer-term may actually increase cost in certain places in the short-term during transition.
• a competitive provider landscape helps to keep costs down, drives innovation and provides for a fertile environment for ongoing development of efficiencies.

In our view, a voluntary approach, promoting best in breed and continued innovation, against a competitive backdrop would provide a solid framework for driving through change whilst balancing consolidation and local accountability.

The current investment, funding, administration and governance framework for each LGPS Fund has evolved over decades to reflect the local needs and the requirements of the participating employers which are varied. We caution that one size does not fit all - we recognise every Fund is different with different challenges and therefore will have differing objectives for consolidation. Ultimately however, it is governance across all areas that dictates the extent to which efficiencies are achieved and hence our starting point – the implementation of SAB’s Good Governance project. 

We would be delighted to discuss our thoughts in person with the relevant individuals, if so desired.

Yours sincerely

Tony English

Head of LGPS Investment