Until now, UK investment firms with a strong domestic focus could largely ignore the waxing and waning of the ESG wars on the other side of the Atlantic. But things may be about to change.
The big British political story of the past few weeks is the storming local election success of Reform UK, with Nigel Farage’s populist insurgency securing an extrapolated 30 per cent national vote share.
Reform UK’s breakthrough matters not only for the conduct of local government across the country. It also brings into focus the way Britain’s pension assets are managed. By FT Alphaville’s estimates, following the 1st May vote, Reform will have control of key roles overseeing more than £100bn of local government pension assets.
For the uninitiated, the Local Government Pension Scheme of England and Wales — aka the LGPS — is the largest funded pension scheme in the UK by a country mile. UK local authorities have a collective £467bn of assets.
As dedicated FTAV readers will recall, these assets are subdivided into 87 distinct pots across England and Wales, and a further 11 in Scotland, each overseen by an individual Administering Authority.
From the point of view of central government, this has all looked sufficiently weird and inefficient that successive chancellors have sought to force pooling of fund management capabilities. And so there are today eight pooling companies that manage over half of all the assets, with the number of pooling companies on track to fall and the proportion of LGPS assets pooled set to rise.
What has this got to do with Reform UK? Well, each Administering Authority has a pensions committee that is composed of some mix of elected councillors and others. And you know what Reform UK suddenly has a lot of? That’s right. Elected councillors.
Pension power
We can see why a local authority pensions committee might sound like an absolute snorefest, but it’s actually a huge deal.
Some of these committees might just rubber stamp what their pension officers tell them. But their actual powers are significant. It’s the pensions committee that approves each fund’s Investment Strategy Statement and sets strategic asset allocations. It’s the pensions committee that monitors the performance of the pooling companies and determines funding strategies. And it’s the pensions committee that hires and fires investment managers, custodians and advisers. Basically, this is the committee that holds the keys to a local government’s pension assets.
Readers might spot from the chart above that there are a lot more councils than there are Administering Authorities. There are in fact 317 councils and only 87 Administering Authorities. Controlling some councils pretty much translates into control of their pension funds, while others give maybe a single seat on the pensions committee — if that.
Casting our slide rule across all the pension funds linked to councils in which elections were held on 1st May, Reform’s influence looks sizeable.
We’ve borrowed and adapted MainFT’s cool local election interactive map to convey all the deets of our analysis below.
Hover your mouse over a council to see the number of seats different parties won in May’s election. And then hover your mouse over the red peaks to see how many seats we reckon they’ll get in each Administering Authority’s pension committee, along with the size of pension assets under management etc:
Totting up all the Administering Authorities which look likely to soon have at least one Reform councillor on its pensions committee, we get a number just north of £100bn. This includes around £30bn of assets overseen by Administering Authorities where we reckon Reform councillors will hold the majority of pensions committee seats.
What happens now?
Does Reform have an LGPS game-plan? We got in touch with Richard Tice, deputy leader of Reform UK, to find out. He pointed us to his campaign against “woke net-zero-obsessed investments” that he thinks have underperformed in the parliamentary pension fund — the £862mn scheme for MPs that is sitting on a healthy surplus. This campaign, he suggested, is a model for the party’s approach to funded pension assets.
“The MP’s pension fund is riddled with net zero investments that are underperforming and has 32 per cent of its assets invested in illiquids that are probably overvalued,” Tice told FTAV. “This net zero obsession leaves the taxpayer on the hook for tens of millions of pounds.”
We don’t have the performance figures to hand for the parliamentary pension fund but it’s true that ‘sustainable’ funds have generally underperformed in H224. That said, the MP’s pension fund’s largest allocation is recorded in the annual report as the ‘BlackRock Low Carbon Fund’. We understand this refers to BlackRock’s ACS World Low Carbon Screened and Optimised Equity Tracker Fund, where returns haven’t been exactly terrible. The Fund returned 22.1 per cent in 2024 and 17.3 per cent in 2023 — a couple of percentage points ahead each year of the full-fat, unwoke MSCI ACWI index in GBP.
Tice told us that he doesn’t trust LGPS investment performance, adding “we are going to be looking closely at this and I’ll be very grumpy if these pension schemes have bigger deficits because they’ve been underperforming because of woke investments”.
Tice may not need to worry. As we explained in February, LGPS funds with deficits look like they will be vanishingly rare once the triennial valuation is complete.
It will be ages before the March 2025 valuation cycle is completed and we can report this as fact rather than conjecture, but Isio — the investment consultant — estimates that almost every fund was in surplus at the end of last year on their super-conservative measure, and we’d be stunned if the official numbers don’t look meaningfully better when they finally arrive.
But do councils invest in stuff that Reform UK might consider to be woke, net zero nonsense? Almost certainly. And will some of these have underperformed their benchmarks? It would be a miracle if they hadn’t. As such, we expect Tice to be very grumpy.
Staffordshire pension fund has a climate change strategy, which says it is committed to achieving a portfolio of assets with net zero carbon emissions by 2050. It’s the same for the funds of Nottingham, Kent and Derbyshire. Each of these funds, we reckon, will be overseen by committees consisting mostly of Reform UK councillors who were elected in part on the promise to scrap net zero targets.
Peering into Staffordshire’s annual report, a few allocations stand out with names which we suspect Reform will sound a bit woke. Some £317mn — just over 4 per cent of their total fund — was invested with Impax Asset management in what looks to be a sustainable global equity mandate. And £467mn was invested in strategies managed by LGPS Central — their pooling company — in potentially woke-sounding funds (‘Sustainable Equities’ and ‘Low Carbon Multi Factor’).
While these products will no doubt have all had incredibly good performance spells at some time in their lives, it looks from the draft annual report as though a couple of them had a torrid twelve months in relative terms (high-res):
It falls to the pensions committee to decide whether to terminate these mandates, or let them continue.
All change?
Back in November the Ministry of Housing, Communities and Local Government opened a nine week consultation on LGPS pensions — including the governance arrangements that should be enshrined in new legislation. We’re still waiting to see where this will end up, but the government’s preferred landing spot looks fairly clear: pool more assets, and look a bit more… Canadian? Specifically, the consultation reads, Administering Authorities:
would be required to fully delegate the implementation of investment strategy to the pool, and to take their principal advice on their investment strategy from the pool … [and] … to transfer legacy assets to the management of the pool
Rather than manage vast multi-employer schemes, the administering authorities would feel a bit more like members of even larger multi-employer schemes.
And in terms of powers, the consultation outlines a world in which pensions committees would be setting investment objectives and the approach taken towards responsible investment, but would find their ability to hire and fire individual investment managers stripped and handed to the pooling companies.
With everything up in the air, it is entirely possible that control of LGPS pensions by Reform councillors will be a brief affair, and that the forthcoming pensions bill mandates full delegation away from the Administering Authority pensions committees and towards the pooling companies. But it’s worth recalling that pooling companies are owned by, and accountable to, their clients. And there’s nothing we can see in the consultation that would change this.
Will the UK follow America’s lead in its war on woke capitalism?
It’s not hard to see where this story could go.
Since 2021, when the Texas senate passed SB 13 — a bill prohibiting some state entities from entering contracts with companies that the Texas comptroller has determined to be boycotting fossil fuel companies — public pension ESG rules across different states have become an absolute hot mess of a smörgåsbord.
And while the $5.5tn of US public pension funds may sound modest compared to the $77.8tn of total assets managed by North American investment management firms, the fees they spill have been large enough to make any investment management CEO reconsider their priorities.
Since the culture wars came to asset management, US managers have left climate initiatives like CA 100+ in droves, and global asset management firms have found themselves contorted to the point of ridicule over their stance towards ESG as they seek to serve the very different demands of European and American markets.
LGPS assets of England and Wales are smaller than their US counterparts. But so are UK investment managers. LGPS funds collectively paid £1.8bn in investment management fees in the year ending March 2024.
In the context of aggregate net UK investment management industry revenues totalling £22.6bn for the year ending 2023, that’s not small change.
It seems likely that Reform UK’s success in May’s local government elections will result in changes to investment mandates for UK asset managers and pooling companies. The longer-term impact is contingent on how the forthcoming pensions bill is shaped. But regardless, it has the potential to create a real chilling effect across the UK asset management industry’s approach to net zero.
This is going to be a big deal.
https://www.ft.com/content/d7858718-91a9-4881-baa6-10dc7c05a260
