The UK Pension Schemes Bill has cleared its final parliamentary stages, and is expected to receive Royal Assent, granting ministers new powers to place asset pooling for the UK’s £400bn-plus Local Government Pension Scheme (LGPS) on a statutory footing. So, what does this mean for investment decisions and alternatives?
With the Bill now in place, the government requires LGPS funds to pool all their assets into six “megafunds”. This was technically due to be completed by 31 March 2026; however, ministers previously lacked the statutory footing to implement such a move and, following the missed deadline, have since relaxed some pooling requirements, including those relating to Financial Conduct Authority (FCA) authorisation.
Investment decisions will now shift to these six megafunds – or pools – which could potentially impact private credit managers targeting these pension investors.
The LGPS, one of the UK’s largest schemes with more than seven million members, comprises 86 funds in England and Wales and 11 in Scotland.
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Since 2015 and until now, the 86 funds in England and Wales have been grouped into eight investment pools. However, under the government’s “Fit for the Future” reforms, ministers have pushed to accelerate pooling further, requiring all listed and unlisted assets to be managed by pools.
Ministers also rejected the proposals of two pools, ACCESS and Brunel, forcing consolidation into six “megafunds”. Two of these, Border to Coast and LGPS Central, are expected to exceed £100bn in assets.
However, full pooling of the 86 funds has still not been achieved despite the end-March deadline, with some industry figures telling Alternative Credit Investor (ACI) that the process could take a further 18 months. Meanwhile, two pools, the Wales Pension Partnership and Northern LGPS, have yet to secure FCA authorisation.
Alongside pooling reforms, the final version of the Bill significantly narrowed mandation powers included in earlier drafts, following concerns raised in the House of Lords and by the wider pensions industry. Overall, the Bill stopped short of allowing intervention in specific investment decisions.
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But what does the consolidation of the funds into six pools mean for investment decisions? The major change is that investment decisions will move to the pools, while funds must take advice from them when creating their strategic asset allocation.
How funds approach private credit investing will change under the new rules, as William Bourne, independent adviser to three funds within the LGPS and founder of Linchpin Advisory, explains.
“Funds can either set high risk and return level objectives or alternatively use a government mandated template,” he told ACI. “The latter allows them to set the weighting to listed equities, for example, but not UK/non-UK or passive/active. Private credit is a separate asset class in this template.”
Furthermore, with the pooling of assets, more pools may seek to create their own funds rather than working with managers, the bigger the pool, the greater the in-house expertise.
“In due course that is what the government would like them to do, but in the short term most pools don’t have the expertise to do so,” Bourne added. “From the funds’ perspective, the pools need to show they are competitive with the private sector both in performance and value for money terms.
“But I expect any move to internally managed funds to take time, especially in the area of alternatives.”
Many experts within the scheme, both funds and pools alike, told ACI they are looking towards private credit as they diversify away from equities, undeterred by the negative scrutiny around the US wealth market’s sell-off of the asset class.
Bourne stated: “Investors understand there are opportunities where banks have stepped away from lending to small and medium-sized enterprises (SME). Because of the pressure to invest locally, LGPS funds are particularly interested in local SME lending.”
