Two years on from the launch of the LGPS pools, seven senior figures tell James Phillips all about the process and their plans.
As pictured clockwise from top left above
Mike Weston, chief executive at LGPS Central
Laura Chappell, chief executive at Brunel Pension Partnership
Mike O'Donnell, chief executive at London CIV
Richard J Tomlinson, chief investment officer at Local Pensions Partnership
Kevin McDonald, interim director at Access Support Unit
Rachel Elwell, chief executive at Border to Coast Pensions Partnership
Anthony Parnell, treasury and pension investments manager at Carmarthenshire County Council, host authority for the Wales Pension Partnership
In July 2015, the new Conservative government announced a major shake-up to the Local Government Pension Scheme (LGPS) in England and Wales. The 79 local authority funds across the two nations would be asked to pool their investments.
The aim was simple: by investing collectively, the LGPS could leverage its scale to improve its investment opportunities and reduce costs.
It has now been two years since eight pools emerged, operating largely in a similar way but with key differences in terms of their operational arrangements. Some have opted to create their own services companies, regulated by the Financial Conduct Authority and launching their own authorized contractual scheme (ACS), tax-transparent funds designed largely for institutional investors. Some LGPS funds have chosen the collective investment vehicle (CIV) route, renting an ACS operator and governing by a joint committee of local authority funds. And others have mildly different set-ups.
The created funds are Access, Border to Coast Pensions Partnership, Brunel Pension Partnership, LGPS Central, Local Pension Partnership, London CIV, Northern LGPS, and Wales Pension Partnership.
Around £119.5bn of LGPS assets have now been transferred to these pools, with much of this from existing liquid investments, including equities. Now, two years on, the pools are looking at the harder assets, always keeping an eye on the shared objectives they agreed with their partner funds. Here, seven of the funds explain how things have progressed, what is next on their list, and the challenges they have and will face.
How have you found the pooling experience so far?
Pooling has rewritten LGPS investment. Just about all investment activity now is seen through the lens of pooling, and if one goes back six years, that was probably unlikely to be anyone's outlook. There have always been commonalities between LGPS authorities, and degrees of collaboration and parallel working, but pooling has built on those foundations and we now have what was always a relatively well connected set of people working in a far closer investment community. Just on Access, for example, we've got 11 authorities; the commonalities between us included that all authorities only used external mandates. And the commonality extended to the fact that around about 75% of the assets at the outset fell across around about a dozen investment houses. We were able to look at that as our starting position and move forward from there. The impact has been fundamental and far reaching and we continue to see it unfold.
It's certainly been a fantastic journey that we've been on over the last couple of years. Border to Coast is fortunate because the partner funds, while not regionally based, made an active decision to work with each other. And while it's not the same degree of commonality that Kevin's just outlined, there certainly was an appetite to make difficult decisions early on, such as colocation, and really to roll up the sleeves and address difficult questions.
We spent time making sure that we're clear about the design of the funds that we've launched, and made sure that there was a degree of commonality and compromise that still worked for partner funds in delivering their strategy. That's probably the bit that I'm most pleased with; the degree to which the partner funds have built on that idea of collaboration within the LGPS, to work together with us to come up with the funds that will work for them and their strategy.
Collaboration was key. One of the things that really helped us on the journey was spec-ing out the portfolios before the pool even came together. This really helped us get some commonality before we actually went into pooling. Building on that collaboration as part of the product design and product governance work has really helped. I mean, hey, we're halfway through the transition, and as of December we had £15bn under management. That speaks for itself to be honest. It has been a learning curve but we are blessed with ten clients that really want to work together to build something that works for all of them. If you've got that intent in mind, it does make your life a little easier.
We have £20bn of assets under our stewardship, roughly half of the total in our partner funds. In two years, you have to say it's been a real success. We'd probably all say we're a bit frustrated that we haven't been able to move quicker and do more. But if you look at it from a standing start in April 2018, we've come a huge distance. There's still a long way to go - we're roughly halfway there, thanks to a huge amount of commitment and hard work from all the stakeholders. So, yes, it's been a good start, but more to do.
We're really very much still on a journey. Progress in a relatively short period has been good, but there have also been challenges. Having 32 partner funds does add to the degree of interest and that has made a bit more challenging to get alignment. But we continue on that journey. We're also about halfway there, and have had some challenges on governance and on recruitment, both of which we've now made real progress on.
Richard J Tomlinson
We started a little bit sooner, we've got far fewer partner funds, and our governance model is a little bit different. From our perspective, we've got all the pools launched, they've all got substantial capital in them, and pooling's done for us now. The next stage is maturing the way we manage the pools and maturing our business.
We were quite lucky. Our advantage was we were working together previously anyway, so when we came together we did the passive collaboration work first, which helped us all get to know each other, so by the time pooling came along, we were all comfortable working with each other. And it has helped when it comes to making decisions. We've pooled about 50% of our funds so far, in global equities and UK equities and passive funds. Over the last few months, obviously we've stalled a bit in launching our fixed income. But we've embraced pooling and we're positive about it, and we're progressing nicely.
What were your immediate focuses in asset classes, and how has the transition work gone?
One of the things that has been a bit challenging is choosing the right fund structure. We all started with an authorized contractual scheme (ACS) structure, but moved into different structures to suit some of the more illiquid assets. We started with a sort of lift and shift, which was largely around equities, both active and passive. And then as you move on to alternative and illiquid stocks, that again becomes more challenging. There are more choices to be made about fund structure and approach.
As soon as you get into alternatives or illiquids, there are many more options, many more different asset classes within that broader description and a broader spread of vehicles utilised by partner funds, so getting the commonality and bringing those assets together is more difficult than simply transitioning equities or fixed income. This is natural progression. You do the easy stuff first - equities, fixed income, and then onto the alternatives
The ACS structure is still less than a decade old. And although that means it's well established, there will be still aspects of learning and development which an ACS has to go through. A number of pools are still engaging with various tax authorities in certain markets who are still having to understand and appreciate what an ACS is. It remains a bit of a work in progress to tutor all of the markets.
Richard J Tomlinson
The most challenging by a mile is real estate in terms of trying to line up tax and regulatory. It's a challenging environment, especially with the fallout in retail property management that the Financial Conduct Authority is currently focused on. Many have suspended all dealings. It's just a challenge.
As you become more illiquid, it does become harder. That said, if you can separate new investments versus legacy, private markets is actually less complex even though it can be more illiquid than real estate, which - because of the tax implications - can really be very complicated and costly if you don't get it right.
I would reflect slightly differently on how we best support our partner funds as they go through strategic asset allocation (SAA) changes while we are still building the pools. One of the early decisions that we made, recognising that the partner funds were wanting to put more into private markets, was to reprioritize the build of the private market capability.
I've heard people talk about the governance premium of pooling but it is still to be tested whether that truly exists. But situations like this really bring home that - as long as you can do this in a risk-controlled way and it's within the risk appetite of the partner funds - you really do want day-to-day investment decisions made in the pool because that's where governance can really support that. You have to make sure that you've got your proposition set up so it facilitates that. There's an element of flexibility for it to change and shift if the partner fund needs change.
We're probably a little bit more focused on the complexity; we've done the easy stuff now. We're working through funds that are more illiquid and slightly harder to design. For example, we've just taken our diversified growth fund and turned that into a diversifying risk fund. On an intellectual level, it's been really great for our investment team, because it's really pushed them. We've been less worried about the vehicle. We choose the right vehicle for whatever we're doing at the right time.
We've got an external ACS operator, but also Russell Investments to do the investment management work. Having them on board has helped us really prioritise asset classes. We went into liquids first, because those were the quick wins; we all had 60% to 65% in equities. We've started looking at real estate now and that is more complex, because different types of real estate mandates are really challenging. It's trying to work out the way of reducing these fees some way or other, and seeing if we can get the managers we currently have on board to try and reduce the fees and to consolidate as well - not necessarily go through the full pooling mechanism but try to do a bit consolidation, first of all.
Find out more about each pool in the infographic below
How are you finding working with the partner funds? Are you finding them all receptive to what you are doing?
In the first few years of Access, we've generally not seen significant change in personnel. The officers and the elected members at each of partners funds have, by and large, remained the same. We have started to see some change to that in the last 12 months, but what has helped us is there wasn't a high turnover in the formative years. We were able to bank a good couple of years of stable membership in all of those forums. That's helped us, because we have a culture of regular dialogue and regular engagement. This is paramount.
We've got really great engagement on fund launches. What sometimes holds us up is their governance structures. They have to get things through pension committees, and we have to time it right. If they can't make a decision, then it might be delayed for a quarter. We have to work really hard to make sure that we land things at the appropriate time to get those fund launches through because if they miss the window, then that causes havoc for all of us.
Where our partner funds differ is in their SAAs and the levels of liabilities. That means we have to work with all of them to make sure we're creating products they want and they're willing to invest in. Ultimately, they have all the same aims in terms of providing returns to their scheme members in the long term, but it's just making sure that we take the different starting positions and go forward and increase the commonality to achieve the maximum benefits from pooling.
Richard J Tomlinson
Our governance model is a little different because of the small number of clients. The delegated authority and the conversations we have are somewhat similar in the sense of talking to partner funds about their SAAs. We're not launching funds. We agreed upfront that we'd be launching seven asset class vehicles; they have seven asset classes in their SAAs. We've launched those funds, so the dialogue for us has been slightly different. What we are seeing now there is some partner funds are saying, ‘what about a small deviation to…?', ‘could you have a pool doing this or that?'.
Our joint governance committee, which is the chairs of the Welsh pension funds, has been pretty stable because we haven't had any elections now since 2017. We found that we've been able to keep them on board. We also have an officer working group which feeds in, and we're very lucky in that the section 151 officers (treasurers of the pension funds), attend nearly all meetings, and we also have bi-weekly calls. We've had buy in from day one from the treasurers. Without that, we'd have had more of a challenge. That's been really helpful to have that buy in in from the higher level down to the lower level.
The support of the section 151 and other senior officers is really important. There are complex stakeholder relationships with lots of different parties involved, from the chairs and the committee members, the pensions officers, the 151s, and the different types of advisers that are involved across the LGPS. We're fortunate that a couple of our board directors are actually nominated by our partner funds and are either chairs or ex-chairs of committees. They are able to bring some insight into the board's decision making. Do we have everybody involved? Absolutely, right through the organisation and the various touch points into our business. That is absolutely key to our success.
What are your plans for the next two years, and how have these been affected by Covid-19?
We are looking at alternatives, what the underlying partner funds' requirements are, and the extent to which Covid-19 impacts our original timeline. We require engagement from the partner funds in order to make sure that, however we shape our offer, it meets their needs. Given the role that local authorities have in responding to the Covid-19 emergency, our timelines need to be flexible.
Our immediate focus is on ESG-related products, including a renewables mandate and an equities exclusion fund. We're also doing some work with colleagues in LPP and London Pensions Fund Authority on an impact fund. Next will be to do some work with partner funds on any changes to their SAAs. We probably would have been right in the middle of that now, but that has been a bit held up by Covid-19. We have to be quite understanding of the partner funds - London boroughs - where the impacts of the response to Covid-19 are huge for them because they provide important services like social care and education. But we've sought to continue keep meetings going, and we have still got engagement from most partners. When it comes to decision making, that will be held up a bit by the current lockdown.
Richard J Tomlinson
We are focused on maturing the business and ensuring we're in the best possible shape for clients going forward. The Covid-19 environment has created some challenges for everybody. First of all, obviously moving to remote working, but the market environment is also going to throw some challenges for all of us in the coming weeks, months, and probably years. One thing we are very focused on is liquidity management within the funds, making sure that we have sufficient liquidity to manage the balance sheet of the funds properly given market liquidity has been somewhat challenging of late. But another key area for us is liquidity management of clients and their balance sheets because the SAAs for our clients don't carry a lot of cash. They tend to have quite a lot of illiquids in them. We're just being very mindful about building out our methodologies and managing liquidity to make sure that we can be resilient, because there are a lot of uncertainties in the portfolio and, from a funding perspective within the local authorities, what might happen to contributions.
We're also doing SAA reviews soon. The key for us is maturing the business, fully institutionalising processes, building out systems and infrastructure, and ESG. Obviously, responsible investment is a key focus for us. We are maturing that through our portfolio management approach, having genuine ESG integration, and building that intersect so it's absolutely part of their core process and not an afterthought.
Our priorities going forward are driven by ultimately achieving the eight shared objectives of the pool. But we need to deliver investment performance on the assets we are currently managing. That's critical because that gives everybody the confidence to transition more assets. At the same time, we are expanding the products that we offer, so there's multi-asset credit, and emerging market debt. We're developing global factor-based equities, and property and infrastructure are coming along. We also need to continue building the organization in parralel - that's personnel, resources, IT, and our process capabilities too.
We had a joint governance committee on 12 March where we had a detailed work plan approved and then a week after it all went a bit pear-shaped. It is a bit disappointing that there are things stalling. Fixed income transition, planned for April, has now been delayed until the end of June at the earliest, but more likely September. Emerging markets equities have also been delayed. They were due to be around September time, potentially in November now.
But this has given us the opportunity to look at policies and governance again. We've got a responsible investment policy in place, but we've also put it in a governance matrix. The delay in doing the transitioning has meant that we could look at the other areas now which will fulfil our governance and audit requirements. We've got a annual update coming out soon, which we'll be publicising. For the first time, this year, we'll be doing an annual report and accounts. So it's still keeping us quite busy.
It is a combination of absolutely making sure that what's already transitioned is being run well in these challenging market conditions. We do have a detailed programme of future fund launches, which stretch out over the next few years and encompass multi-asset credit, real estate, and some additional equity capabilities including those that help manage transition risk to do with climate change. We have already worked with partner funds on what their SAA reviews look like and how that might affect the fund launches that we've got planned. The current situation will have an impact on the delivery of that pipeline.
It's important to note that we're not just working from home, but we're at home trying to work in the middle of a pandemic. And for a lot of us with small children that is challenging. Obviously, there's also a massive impact on the partner funds' capacity. And in addition, it would be very unlikely that people would want to try to attempt large transitions in the current market conditions. All of those things are in our minds as we plan out the next couple of years.
We're challenging our investment strategy at the moment to make sure that it does hold up as long term and sustainable, particularly in the current environment. We're thinking about our strategy as a firm as well, how we're going to work going forward, what we might change, and what might change in our working practices. And, like everybody else, we've got clients that are going through year end in the near term and looking at changing their SAAs.
In the medium term, we've got to complete the transition. There may be opportunities to continue with transition activities but we're monitoring the market closely; we wouldn't consider doing any transitions at this point. There will likely be some push out in some of the future fund launches. We're also looking at fixed income because clearly there are some opportunities there. We're doing quite a lot of research there, which was scheduled in anyway, but we're trying to speed it up if we possibly can.
Once the transitions are finished, we will really be starting to test the resilience and sustainability angle from a responsible investing point of view of the funds that we've built and maybe starting to make some changes to really hone that going forward.
Where would you like to see the pools in five years' time?
Richard J Tomlinson
I'm hoping we'll all be fully pooled, we'll have very happy clients, and there'll be no questions about whether pooling was good or bad. That beast will be slain. I hope we will have proved that this is the right initiative for the client, for the members, and for stakeholders, funding levels will be improved, and we will be seeing a much better environment with all assets in the LGPS well governed, closely controlled, tightly monitored, and in professionally managed environments where everyone knows what needs to be done. There will be fewer surprises and high certainty around outcomes.
Obviously, the elephant in the room is how many pools? I don't know. There may be fewer, there may not be. We've all taken slightly different approaches. I don't believe it's one path to one god. You could see multiple shades of success with the different approaches; each has some pros and cons. But my aspiration is we'll all be in a very strong position and we'll have been allowed to prove that it was exactly the right move. We're definitely seeing strong feedback of success and positive traction across all our clients in terms of, let's call it happiness, with the route we've gone and the route they've taken.
Ultimately, we were set up to deliver value, create investment options, and have a stronger voice on behalf of our partner funds, so that we can actually deliver the benefits of pooling. And I very much hope in our different ways that that's what we're achieving.
We have to deliver investment performance to enable our partner funds to meet their obligations. Our top priority is to prove that we can deliver performance and the cost savings that are factored into all new product launches. We have to prove that our governance structure works and adds value. And we have to prove that we are a responsible investor and can deliver the benefits of pooling.
It's all about delivery. If we get that right, that increases the confidence of our partner funds, and the process will move smoothly through asset transition into business as usual. Then our challenge moves on to continuous improvement so we become a maturing investment management business that can be compared and contrasted with the best that the commercial world has to offer.
There was always going to be an appetite for some observers to compare pools too early. With pooling, what we were trying to get away from was short-term decision making, if it existed, towards looking at performance over a business cycle, a period of five years or more. It's that timescale that would give a more meaningful contrast.
One other thing I'd like to think would better off would be our investments in renewables and on low carbon. We've already started working with three managers in our global growth equity funds to see what the percentage is in carbon investments. I'd like to think in five years' time a lot of our investments will be ESG-focused and that we'd therefore have a lower carbon footprint as individual funds and as a pool.
It will partly depend on what comes out of government in terms of guidance and there are various potential scenarios. We're still waiting but the most likely outcome will probably leave us largely where we are and that's probably the right answer. But, there are scenarios where that could be given a much firmer push. And we all know there are still debates around government on potential alternatives, how many pools, active versus passive, etc. There's a bit of an unknown there in terms of regulation and guidance.
What are your closing thoughts?
What we already had in common has proved to be an effective foundation. That's driven the engagement we've been able to sustain. To date, we've pretty much pooled half of the available assets in the ACS or through the jointly-procured passive manager; the pipeline for us would take that to about 70%. And then the challenge is where we go, particularly with alternatives. But we've got good engagement, good people, and the potential to achieve our objectives.
We've made really good progress so far, working very closely with our partner funds. We're also at around 50% of the assets pooled and, if we put to one side some of the things that are a bit harder, we end up at around about 80% pooled in about three to four years with a fair wind and reflecting on the discussion we've already had around Covid-19. For that success to continue, we need to continue to work closely.
In these unprecedented times, there remain lots of opportunities to really prove to our clients that they can trust us in sourcing great opportunities and taking some of the burden off them. Our people in the councils are terribly stretched at the moment. Most of our clients are also doing treasury and we know how difficult that is at this time. There has to be some good coming out of the other side as well as some of the chaos.
We've made a good start but there's still much to prove. I'm looking forward to much more hard work, much more challenge, but we'll overcome that with more communication with all of our stakeholders, and building more consensus with the partner funds.
We're heading in the right direction. The fact that there's a bit of variation between pools on approach and structure, etc. I don't think is a bad thing. That simply reflects different starting points. We need to continue to demonstrate good performance and delivery of good value. What is key for us at the moment is just responding to the much more significant climate change agenda. About 25 of our partner funds have declared a climate change emergency so that drives lots of activity.
Richard J Tomlinson
I love my job because we're trying to deliver the best of the private sector but in a public sector, greater good mission framework, which is hugely engaging. People ask you ‘what do you do?' Well, you could say we're hedging state liabilities, but if we do our jobs well, we can also lower the burden on the taxpayer, leaving more money to spend on the really important things in local authorities. It transcends all of us, but it is so important. If we keep on track, there are real world impacts to what we do. Framing the whole pooling initiative in the context of the greater mission and then thriving is personally hugely engaging.
I've been working in pensions for over 13 years and I think the last four years have probably been the most interesting, especially proving to Treasury that Wales could become a pool in its own right. The LGPS should be commended for the work it has done in the last two-plus years to get these pools set up in such a short space of time. A heck of a lot has been done. If you could do as much as that over the next five years and more, we'd have done a hell of a job for taxpayers, employers and all the stakeholders.
Northern LGPS was also invited to participate but was unavailable.
Nearly every trustee is confident of the next stage in their scheme’s strategy, despite almost an equal number being forced to consider replacing plans within the prior 12 months, according to research by Barnett Waddingham.
Companies could be overstating their pension liabilities by up to £60bn due to their life expectancy assumptions, according to XPS Pensions Group.
Defined benefit (DB) schemes that provide GMPs must revisit and, where necessary, top-up historic cash equivalent transfer values (CETVs) that have been calculated on an unequal basis, a landmark court judgment said last week.
Regulators must act now to impose some "proper regulation" to stop another defined benefit (DB) transfer advice disaster, saysTim Sargisson.
Opportunities for defined benefit (DB) schemes to pursue investment approaches that help repair the UK’s economy cannot stand in the way of improving member outcomes, Aegon says.