Town hall pension schemes to be asked to double riskier asset allocations

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Pension plans for local authority staff in England and Wales will be asked to double their allocations to riskier assets under measures announced in the Autumn Statement aimed at unlocking tens of billions of pounds to stimulate economic growth.

The government confirmed it would revise guidance governing the £360bn Local Government Pension Scheme (LGPS), which is administered by 86 town hall pension funds, so more cash is directed towards UK start-ups.

The LGPS would be set a new goal to implement a 10 per cent allocation to private equity, considered a riskier asset class because it invests in unquoted companies often using leverage. Buyout firms also typically charge high fees to investors.

The LGPS had about 4.3 per cent allocated to private equity two years ago, according to its 2021-22 annual report.

The measures, which the government estimates could unlock about £30bn in funding for UK growth, were part of a broader package aimed at freeing up public and private pension capital to fuel the economy, against a backdrop of strained public finances.

“Today’s Autumn Statement contains big steps forward to create the long-term framework we need to drive investment into high-growth businesses in the UK,” said Michael Moore, chief executive of the British Private Equity and Venture Capital Association.

Another proposal in the Autumn Statement aims to make it easier for employers to access surpluses built up in thousands of well-funded defined benefit (DB) “final salary” style pension plans.

Many of these schemes have swung into funding surpluses over the past 18 months after decades of deficits, driven by the high interest rate environment.

The chancellor indicated on Wednesday that the current 35 per cent tax on surplus funds which are taken out of a scheme would be reduced to 25 per cent from next April.

“Today’s announcement represents a huge leap forward in plans to allow well-funded DB schemes to invest for growth,” said Steve Webb, a former pensions minister and now a partner with LCP, the actuarial consultants.

To increase opportunities for these schemes to invest in productive finance while fully protecting member benefits, the government said it would consult this winter on how the Pension Protection Fund, the industry lifeboat scheme, could take on a new role as a consolidator for corporate pension schemes unattractive to commercial providers.

“This may be a precursor to the chancellor looking to the PPF to make the type of infrastructure investments/release of pension cash for investment that he raised in his Mansion House speech [in July],” said Rachael Healey, partner at law firm RPC.

Michael Tory, co-author of a report by the Tony Blair Institute which suggested wide-ranging reforms to the pensions market, welcomed reform of the lifeboat scheme.

“The PPF has for over 15 years now demonstrated . . . that the crucial ingredients of scale, time horizon and professional management of diversified assets best secures long-term returns for savers — and the sooner these benefits can be extended beyond the PPF’s current remit the better,” he said.

“It makes no sense for UK savers that they can only gain these ingredients when their pension fund sponsor goes broke.”

For personal retirement savers, the chancellor also confirmed plans to consult on sweeping changes to the pension market, to give workers the right to choose their own workplace pension fund. At present, employers are charged with choosing, on behalf of the workforce, a scheme to pay pension contributions into.

The government said a “Lifetime Provider” pension model would give savers “greater agency and control over their pension” and would deal with the problem of millions of small pension pots building in the system as people move jobs.

But some experts said this change, and the wider reform package, was exposing the pension system to “very significant risks”, including the high allocation for LGPS to private equity assets.

“Some measures are *very* ill-judged,” said Mick McAteer, a former board member of the Financial Conduct Authority, adding they could “undermine pension security, allow City [fund managers] to extract higher fees and reduce pension values”.