The UK government’s wish to see local government pension schemes (LGPS) invest more in UK equities could lead to a breach of their fiduciary duty, according to industry sources.
It also raises governance issues and whether it is right for a government to be mandating how pension funds chose to invest.
The criticism follows the recently announced UK budget in which the chancellor confirmed the intention to require LGPS funds to disclose a breakdown of their asset allocations, including UK equities.
LGPS funds back Schroders Greencoat investment in UK solar farm
The chancellor also stated that if these measures did not lead to an increase in allocations to UK equities, the government may consider “further action”.
According to Louis-Paul Hill, associate partner at Aon, the government should instead be asking why the funds’ allocation to UK equities is not as high as it would like in comparison to private pension funds.
“Funds invest in order to deliver the benefits to members cost-effectively for their employers, which means investing to generate the best risk-adjusted returns,” said Hill.
UK funds suffered record outflows in 2023 – Pridham Report
UK listed companies currently make up just 4% of the total global equity market and UK equities have produced weaker returns than global equities over the last 20 years when comparing the FTSE share index with an MSCI All World Index.
“This supports Aon’s, and many LGPS funds’, preference to invest globally through considering a global investment opportunity set,” said Hill.
The government’s latest measure follows recently published consultation calling on LGPS funds to invest more in private equity and government-approved ‘levelling up’ schemes.
UK corporates face ESG and pension progress lag, study shows
According to Mary Lambe, head of LGPS governance at Aon, reporting on the percentage allocated to UK equities won’t itself change investment behaviour and nor should it.
“We don’t believe Government should be mandating how LGPS funds invest, and it is not clear how that fits with the fiduciary duty of pensions committees,” said Lambe.
These views were supported by pensions consultant Hymans Roberston, whose head of LGPS investment Iain Campbell, referred to some “raised eyebrows” over the announcement.
“Great efforts have been made to diversify investments globally, opening up a larger investment opportunity set, and any reversal of this could well create a challenge to fiduciary duty,” said Campbell.
