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Ministers have blocked local authority pension funds in England and Wales from joining a single vehicle to manage their assets, citing the risk of capacity constraints, despite previously touting the benefits of scale.

Government officials told the 21 heads of local authority pension schemes in July they were “unable to rule out ministerial intervention” in the event that all the funds opted to join the same pool, in an email seen by the Financial Times.

“Given the capacity constraints for existing pools, it will likely not be possible for a single pool to take on all 21 authorities,” said the email from the Ministry of Housing, Communities and Local Government. “Authorities should also take the interaction with local government reorganisation and devolution into account.”

The email came after the government ordered the closure of two of the eight pools that manage the assets of the £392bn Local Government Pension Scheme of England and Wales, which manages the retirement savings of 6.7mn people who work or worked mainly in the public sector.

The government has said a system with fewer, larger funds will lower running costs and enable more investment in big infrastructure projects and scale-up companies.

People familiar with the email said the government’s intervention was made in response to an early indication that some local authorities were keen to act to create one megafund, while ministers wanted to ensure assets were spread more evenly across the remaining pools.

The 21 local authorities in the Access and Brunel pools were given until September 30 to notify ministers of the pool to which they planned to move, with a transition deadline of March 2026. 

People close to the remaining six pools agreed they would struggle to take on more than £100bn of assets by next spring, owing to cultural compatibility with some local authorities as well as capacity constraints.  

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Seven local authority pension funds, including Kent and Cambridgeshire, have announced they will pool their assets with Border to Coast (BCPP), which will make it the largest pool with about £110bn of assets in total.  

A further seven pension funds, including Hampshire and Oxfordshire, have said they will move to LGPS Central, bringing its assets close to £100bn. 

Four have announced they will merge with Local Pensions Partnership Investments. It operates in closest alignment with the government’s preferred structure as a fiduciary investment manager, which advises councils on their asset allocation, and the transfer will take its assets to roughly £42bn. 

Cornwall, Buckinghamshire and the Environment Agency pension funds, with combined assets of more than £11bn, have yet to announce their decision. But people familiar with the matter said LPPI was likely to gain at least two of the funds, with one also considering joining London CIV.

The process to consolidate the assets of LGPS and convert all of the pools into professionally run fiduciary investment managers began under the Conservatives in 2015 and has been taken up by Labour chancellor Rachel Reeves, who has described economic growth as her top priority.

The overhaul in how retirement savings are managed will release more than £20bn for investment in infrastructure and private businesses by increasing their buying power and saving costs, according to official estimates.

The Ministry of Housing, Communities and Local Government said in a statement that LGPS was a “local scheme”.

“Local decisions are made on new pooling arrangements to ensure the scheme meets the government’s expectations of resilience, value for money and minimum standards for asset pooling,” it added.

Data visualisation by Toby Nangle