Policymakers should build on the existing strengths of the Local Government Pension Scheme (LGPS) rather than pursue a fundamental redesign of the scheme, Pensions UK has argued, amid ongoing debate over the future role of its assets.

In its new report, Local Government Pension Scheme: Supporting local workers, delivering local growth, Pensions UK said the policy priority should be the effective implementation of current reforms, alongside strengthening the pipeline of investable UK opportunities, improving public-private partnerships and removing barriers to long-term pension investment.

The report comes amid continued discussion over the future structure and purpose of the LGPS, with Pensions UK arguing that recent suggestions that the scheme could be replaced by, or repurposed as, a sovereign wealth fund overlook its legal purpose and existing strengths.

It stressed that, unlike a sovereign wealth fund, the LGPS is a funded pension scheme whose purpose is to provide promised benefits to its more than 7.6 million members.

Pensions UK argued that the policy priority should therefore be “steady evolution, not structural upheaval”, with government focusing on current reforms and ensuring funds and pools have sufficient resources, time and partnerships to implement them effectively.

The industry body also warned against proposals to close access to the defined benefit (DB) scheme for new local government employees and move future workers into defined contribution (DC) arrangements.

It suggested that such a move would be likely to result in lower pension values for future cohorts, while potentially increasing administrative complexity for employers and weakening the reward package used to recruit and retain workers delivering local services.

Pensions UK also argued that closing the LGPS to new entrants could weaken its ability to invest over the long term, as an ageing membership and shorter investment horizon could reduce funds’ capacity to take the type of long-term investment risk the government is seeking from pension schemes to support economic growth.

According to the report, LGPS funding levels in England and Wales improved significantly at the 2025 valuations, with the average funding level rising from 105 per cent in 2022 to 122 per cent.

Of the 86 administering authority funds, 79 (91 per cent) were at least fully funded, 63 were more than 110 per cent funded, and 26 were above 130 per cent.

Pensions UK claimed this stronger funding position had already benefited employers and taxpayers, with average employer contribution rates on pensionable pay falling by 22 per cent between 2022 and 2025, from 21.3 per cent to 16.6 per cent, and 99 per cent of funds recording lower rates.

The report also highlighted the LGPS’s existing contribution to UK investment.

Based on available data from 67 funds, LGPS funds in England and Wales held £68.6bn in UK assets as at March 2025, including £6.1bn in UK private equity and £11.7bn in UK infrastructure.

This represented around 17 per cent of LGPS assets in England and Wales, although Pensions UK said the figure was likely to understate the true level owing to incomplete reporting, pointing to previous estimates suggesting UK exposure could be as high as 28 per cent.

Pensions UK also highlighted examples of LGPS capital supporting UK housing, infrastructure and regional growth; however, the report argued that further domestic investment would depend on policymakers improving the supply of suitable opportunities rather than simply redesigning the pension scheme.

With this in mind, it called for stronger market conditions, risk-sharing mechanisms and fiscal incentives, alongside action to address the treatment of LGPS assets within public sector finances, which it said could restrict co-investment with institutions such as the National Wealth Fund and British Business Bank.

Pensions UK concluded that the LGPS was already delivering many of the outcomes policymakers want from pension funds, including secure retirement incomes, value for employers and taxpayers and substantial long-term investment in the UK economy.

It stated the challenge was therefore not to fundamentally redesign the model, but to build on its strengths by effectively delivering the current reforms to pooling, governance and administration.

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