Frequently asked questions
How does the Fund work?
The Local Government Pension Scheme (LGPS) is a career average revalued earnings scheme. This means your benefits are based on your salary for each year you are in the scheme. Each year, 1/49th of your pensionable pay is put into your pension account. If you joined the LGPS before 1 April 2014, you have membership in the final salary scheme. Your final salary benefits are worked out differently.
The LGPS is one of the world’s largest funded pension schemes and a key player in global markets, investing around £359 billion worldwide. The scheme is administered locally by pension funds across the country who make decisions about your pension. These pension funds decide how pension contributions are invested.
How does Leicestershire County Council Pension Fund invest?
Leicestershire County Council Pension Fund (the Fund) is administered by the County Council on behalf of 200 employers and over 100,000 scheme members. The Local Pension Committee decides how pension contributions are invested.
The Fund is diversified across a range of investments globally across companies, property, infrastructure, and government bonds.
The Fund does not actively choose to invest in specific companies, instead investing through LGPS Central and investment managers in line with appropriate regulations.
Thanks to strong investment returns and a prudent funding strategy, as of March 2023 Leicestershire County Council Pension Fund is a fully funded scheme.
How do investment returns impact my pension?
Your pension benefits or contributions are not affected by investment returns. If there is a shortfall between the funding level and investment returns, the shortfall is borne by the employer, not you ( the scheme member).
The Fund invests to lessen any burden on the employer in a risk-adjusted manner. You can find more about the Fund’s investment approach in the Investment Strategy Statement.
What about the risk of fossil fuel investments?
The Fund recognises the climate emergency and the financial risk this poses, as well as the opportunities from climate solutions. The risk of ‘stranded assets’ is addressed through the investment strategy, risk register, Net Zero Climate Strategy and all investment processes in line with how we consider all other investment risks such as global economic slowdown and geopolitical uncertainty.
The majority of the Fund’s exposure is through investment in listed equity (shares in companies) which means the Fund has exposure to fossil fuel given their significant share of the global market. This passive approach is important to the Fund due to very low investment management fees, and diversification from active equity investments where managers choose which companies to invest in. Whereas our active listed equity managers consider investments on a case-by-case basis integrating climate risk considerations into their investment processes, and routinely engage with company management of the stocks they own, or are considering within the portfolio. These are decisions we believe are best left to our Investment Managers.
To manage ‘stranded asset’ risk, the fund monitors its exposure annually through the Climate Risk Report and further considers its strategic asset allocation. As set out in the Net Zero Climate Strategy the Fund looks to reduce its exposure to fossil fuel reserves, alongside the Fund’s approach to engagement with investment managers and companies to support a fair and just transition to net zero. This exposure has reduced year on year since 2019 in line with this aim.
Why doesn’t the Fund just stop investing in all fossil fuels?
There is a lot of discussion about whether pension funds and other financial institutions should stop investing in fossil fuel producers. The Local Pension Committee has decided to gradually reduce exposure to fossil fuel companies to best manage risk and opportunities to the Fund.
Our active investment managers make daily investment decisions considering relevant factors. They can decide not to invest based on risk or decide to reduce exposure to certain industries or sectors, or divest entirely from specific companies.
While instructing managers to stop these investments completely, or investing in specific fossil fuel free mandates would make the Fund’s climate metrics look better, it would not impact real world carbon emissions. It also would not be financially prudent were other investment options to cost more in management fees and transition fees.
Instead, divestment can mean that other investors, who are less responsible, may buy these shares , or move companies to private markets where there is less transparency and governance. This would limit our ability to engage and increase our stewardship activities which are reported quarterly to the Local Pension Committee.
The Fund focuses on working together with companies and votes at important meetings. This includes votes against management and pay packages where companies are materially misaligned to the goals of the Paris Agreement as appropriate with the engagement process.
We also ensure that investment managers demonstrate their own environmental, social and governance credentials prior to being appointed.
The Fund’s approach to ensuring managers take climate risk seriously is outlined in more detail in the Net Zero Climate Strategy.
What is the Fund doing to achieve Net Zero by 2050?
The Fund’s Net Zero Climate Strategy (NZCS) sets out a number of strategic principals on how the Fund will look to target net zero by 2050, with an ambition for sooner
Alongside engagement and stewardship the Fund has invested over £1billion in investment funds that correlate positive climate considerations with financial performance.
Not all investments we make at this stage may make financial sense to align to net zero considerations, either due to their lack of historic performance, how they fit with the Fund’s long-term funding strategy or the management and transition fees required. However, we will always look to make these investments where they are inline with the Fund’s fiduciary duty.
Why has the Fund not chosen an earlier Net Zero date?
Climate change is a systemic risk. The Intergovernmental Panel of Climate Change have stated that to keep global warming to 1.5°C by 2100, emissions must reach net zero in 2050.
As of writing the Net Zero Climate Strategy, to set an earlier date would require a more proactive strategy: our Investment Advisor Hymans Robertson advised the Fund that an earlier date could potentially “increase execution costs and risk”. However, the Fund will seek to target net zero sooner than 2050 where feasible.
As part of the engagement from July-September 2022 it was evident that scheme members and employers were supportive of the Fund’s targets and measures. Of those who took part 70% supported the Fund targeting net zero by 2050, with an ambition for sooner. This is the target that the Fund adopted within the NZCS.
How is the Fund considering the impact of climate risk to its assets?
The Fund, through LGPS Central has now undertaken two sets of climate scenario analyses externally undertaken on its holdings to understand the risk each type of asset could face by 2050 under various climate scenarios. This makes clear that in a ‘failed’ scenario there is significant reduction in investment returns to the Fund.
While we can’t use this analysis as a tool to predict the future, it does allow us to better understand the different climate-related risks across the portfolio and show the importance of supporting a smooth transition to net zero by 2050.
The Fund considers these factors across the portfolio, and is not limited to fossil fuel companies. The Fund reports its top 10 emitters as part of its annual Climate Risk Report and from this it is clear there are a number of different sectors that significantly contribute to emissions; however some of these will also be crucial in the transition to renewables and net zero.