The Treasury has confirmed in talks with the Local Government Association that all council pension funds will be required by the government to invest in pooled vehicles of around £30bn.
While the government announced plans to invite authorities to propose “common criteria for delivering savings” for local government pension schemes in the July Budget, it was previously thought this would allow funds to continue investing independently if they made sufficient savings.
However, Jeff Houston, head of pensions at the LGA (pictured), said the Treasury has subsequently said it plans to force all pension funds to invest via a pooled vehicle.
According to the LGA, the savings criteria mentioned in the Budget document refer to the Treasury’s requirements for these vehicles.
“The Budget document was vague,” Mr Houston told LGC. “[The plans] are becoming clear now that we have had conversations with the government.
“Every fund must invest in a vehicle that meets criteria relating to size [of assets under management], cost and governance.”
Clarity over the government’s plans for the LGPS comes after former West Midlands Pension Fund director Brian Bailey raised concerns about the practicality of widespread asset pooling.
While specific requirements for the pooled vehicles’ criteria are yet to be agreed, LGPS funds will now have the chance to come forward with informal proposals for these.
The government is expected to publish the final set in November, most likely as statutory guidance, according to the LGA.
Mr Houston said ministers thought that pooled vehicles of around £30bn were large enough.
There are currently around 100 funds with a combined value of £180bn.
Mr Houston added: “That [£30bn figure] is subject to the caveat that ministers haven’t expressed a view [on the actual size] but they aren’t interested in just five or six funds collaborating; they want something more substantial,” he said.
He stressed the £30bn figure was not an absolute minimum.
He said existing vehicles such as the London Collective Investment Vehicle (CIV), which will have around £24bn in assets, would not be automatically disregarded.
“Nobody is going to say, ‘the London CIV can’t be used because it’s not big enough’; it could be the building block for the right vehicle and maybe other funds will join,” said Mr Houston.
He added that there “will have to be exemptions” for pooling certain assets such as illiquid infrastructure holdings, to which funds may already be committed for 10 to 15 years.
“The government is mindful that there will be transition issues. They want the structures in place within this parliament, but every single pound doesn’t have to be invested in them within that time,” Mr Houston said.
He added that the government was “open-minded” about the types of pooled vehicle it would consider acceptable.
“They could be CIVs, and for passively managed assets, it could even be achieved through joint procurement in a national framework,” said Mr Houston.
The LGA has hosted meetings in the last week with both LGPS officers and the investment management industry to inform them of the development.
Mr Houston said he will provide a further update and a discussion forum at the LGC Investment Summit at Celtic Manor on 10 September.