How does LGPS investment pooling work?

Pensions are a distant concern for many, but for the millions of people who contribute to the Local Government Pension Scheme (LGPS), the way those funds are invested has a direct impact on their future financial security.

If you're a member of the LGPS or a taxpayer with a vested interest in public finances, the way your money is managed may surprise you. The pooling of investments promises to enhance the scheme's efficiency, but there are also real-world challenges that need addressing.

What is LGPS Investment Pooling?

The Local Government Pension Scheme (LGPS) serves over five million people across the UK. It pools contributions from public sector workers to provide for their pensions in retirement.

But rather than each individual fund managing its investments separately, LGPS funds pool their assets to leverage the collective buying power.

Pooling was introduced in response to government calls for greater efficiency in public pension management. The aim was to reduce the administrative burden on individual local authority pension funds, while also seeking better returns through larger, more strategic investments.

How does the pooling process actually work?

Investment pools are formed by several pension funds coming together and collectively deciding how to invest their resources. Each pool operates under a clear governance structure, often involving independent experts who help guide the investment strategy.

Once a pool is established, each participating fund contributes its assets. The pool’s size allows it to negotiate better deals, access a wider variety of assets, and spread risk more effectively than smaller, standalone funds.

These pools often work with external asset managers to make investment decisions, which may range from global equities to infrastructure projects. As the funds grow, the risk is spread across a greater number of investments, reducing the volatility individual funds may face.

What benefits can pooling bring to members?

First, pooling lowers administrative costs by consolidating operations and streamlining decision-making processes. When funds combine their resources, they can share services such as actuarial support, compliance, and auditing. This means less money spent on operational overheads, leaving more to be invested.

Second, pooling enhances investment opportunities. By combining their assets, the individual funds gain access to a broader range of investments. This improved diversification helps protect against market fluctuations, as the risks are distributed across different asset types and geographical areas.

Finally, there is room for more cost-effective investment management. Larger pools have greater bargaining power, which can reduce management fees and improve returns for members.

What are the challenges and current debates?

One of the main concerns is governance. With so many different funds involved, aligning the interests of all participants can be tricky. Different local authorities may have varying priorities, and balancing these interests within the pool can be difficult.

Another issue is the pace of implementation. Not all LGPS pools have moved at the same speed, and some funds have been slow to merge their investments.

As pooling becomes more widespread, the government continues to scrutinise whether it will lead to the promised improvements in efficiency and returns.

Finally, there are debates about the risks of centralising investment decisions. Some argue that pooling may result in a loss of local control over how pension money is invested, which could undermine the scheme’s transparency and accountability.