• Home
  • About
  • 151 IMPACT AWARDS
  • Subscribe
  • Conference
  • Events Calendar
  • Webcast151
  • MOTB
  • Log In
  • Register

Room 151

Impact Awards –>
  • Treasury
  • Technical
  • Funding
  • Resources
  • LGPS
  • Development
  • 151 News
  • Blogs
    • David Green
    • Agent 151
    • Dan Bates
    • Richard Harbord
    • Stephen Sheen
    • James Bevan
    • Steve Bishop
    • Cllr John Clancy
    • David Crum
    • Graham Liddell
    • Ian O’Donnell
    • Jackie Shute
  • Interviews

John Harrison: Hidden risks in the pooling process

0
  • by John Harrison
  • in Blogs · LGPSi
  • — 10 Jul, 2017

Photo: Geralt/Pixabay, CC0

The implementation date for LGPS pooling next year is approaching rapidly. Many of the pools are busy recruiting their boards and senior staff and planning suitable investment administration arrangements, whether using external platforms or building their own. As we approach the end of 2017, we will no doubt have greater clarity on the way in which each pool plans to operate and the people who will be accountable for delivering the restructuring.

Given time pressure on LGPS officers involved in creating the new pools is intense, it is inevitable that much of the sector’s efforts will focus on critical issues, such as recruitment, staffing levels and the investment administration platform. However, there are other, perhaps less obvious, risks that will also need to be managed through the transition to the new world.

Accountability

One key risk is the continuity of management accountability through the implementation process. This is relevant for all the new pools, but perhaps most important for the pools that will assume immediate responsibility for internally managed capabilities, such as Border to Coast and LGPS Central. Any transfers of staff between the authorities and the pools will need to be carefully coordinated to ensure continuous management of the internally managed assets.

The transfer of experienced investment staff to the pools has the potential to create an additional risk for all administering authorities. While the pool will become accountable for manager monitoring, many other investment responsibilities will remain with the authority. This includes asset allocation and the management of liability risks.

Authorities need to ensure they retain or acquire internal resources with the knowledge and experience to guide committees through the complexities involved. Where this is not possible, they may need at least temporarily to rely on external resources, either from their pool or from advisers.

Sub funds

In terms of asset allocation, a live issue within the sector is the number of sub-funds that each pool will offer. It is widely recognised that there is a potential trade-off between flexibility (having more choices) and cost savings (consolidating into a smaller number of larger pots). Less widely discussed is the behavioural risks associated with having too much choice. This could result in delays in decision-making while the options are considered—academics refer to this as “over choice”.

It may also lead to poorly timed switches, particularly between single manager sub-funds. History shows that even the best managers suffer periods of poor performance and that successful long-term investment requires a willingness to stick with good managers through tough times. How easy will that be when the pool is reporting better quarterly returns from similar mandates with other managers?

Transition

The biggest hidden risk, however, is in the transition process itself. Given the scale of the assets involved and the uncertainty of market conditions at any point in time, a mistimed or mishandled transition could impose transaction costs that dwarf the pool’s estimated set-up costs.

The management of this risk has to include the option for the transition to be deferred in adverse market conditions and access to the skills needed to judge whether this should apply. The temptation will be to “outsource” the task to a transition manager in the belief that this is a commoditised service. My colleague at Allenbridge, Steve Webster, has undertaken an extensive review of transition management providers in the last few months. His report, due for publication later this month, shows that this is far from the case.

There are marked differences between providers in the range of capabilities offered and the reporting information provided to clients. Processes may also differ materially, particularly in fixed interest securities, foreign exchange dealing and the management of out-of-market risk. It will be important that the pool or fund initiating the transition fully understands these differences when assessing the suitability of any transition management service.

There are a number of other key areas that will have a direct impact on the transition cost for an individual LGPS fund.

  • Tax: While it may be possible for UK equity assets to be transferred in-specie between legacy investments and pooled funds without paying stamp duty, the same might not be the case for taxes in other jurisdictions, such as financial transaction tax in the EU and stamp duty in Hong Kong and Ireland.  Indeed, pooled transfers can even incur double stamp duty, so careful planning is required.
  • Swing pricing: While designed to protect ongoing investors, arrangements to increase or decrease pricing relative to NAV often lack transparency.
  • Attribution of costs: It is inevitable that some participants in a pool will require proportionately more realignment. There may also be differences in the timing of the transition, with some funds benefiting from first mover advantage. Pools will need to be clear about how transition costs will be both calculated and allocated to the participating funds.

None of these risks is insurmountable, given thoughtful management and effective oversight. The important point is to be aware of them so that mitigating steps are put in place.

John Harrison is managing director, investment advisory at Allenbridge & independent adviser to Surrey Pension Fund.

Share

You may also like...

  • Do LGPS consultants add any value? Do LGPS consultants add any value? 11 Jun, 2013
  • Neo-Chartalists or Neo-Charlatans? A dive into modern monetary theory Neo-Chartalists or Neo-Charlatans? A dive into modern monetary theory 17 Apr, 2019
  • Stephen Sheen: Prudential Framework and the budgetary implications of MRP guidance Stephen Sheen: Prudential Framework and the budgetary implications of MRP guidance 4 Dec, 2017
  • Jackie Shute: A glance back in time through the CIPFA Treasury Management Risk Study Jackie Shute: A glance back in time through the CIPFA Treasury Management Risk Study 30 Nov, 2016

Leave a Reply Cancel reply

You must be logged in to post a comment.

  • Register to become a Room151 user

  • Latest tweets

    Room151 10 hours ago

    Impact Awards: Liverpool’s cafe culture and Warrington’s investment in homes: The CCLA/Room151 Impact Awards showcase  finance teams with a direct impact on their local communities and the environment. This week we spotlight Liverpool City Council’s… dlvr.it/RxJsKb pic.twitter.com/dEYpaz6HP0

    Room151 13 hours ago

    Doing something in #localgov #finance for housing or regeneration? Check out the 'Place Shaping' category room151.co.uk/impact-awards/… sponsored by @31tenConsulting in the CCLA/Room151 Impact Awards. #timetoenter !! pic.twitter.com/dU99vE6Wws

    Room151 1 day ago

    Doing something in #localgov #finance for Adult Social Care & Health? Check out the ASC&H category room151.co.uk/impact-awards/… sponsored by Fundamentum Social Housing REIT in the CCLA/Room151 Impact Awards. #timetoenter !!

    Room151 1 day ago

    Doing something in #localgov #finance for the environment? Check out the 'carbon management' category room151.co.uk/impact-awards/… sponsored by @ACSLLP in the CCLA/Room151 Impact Awards. #timetoenter !!

    Room151 1 day ago

    So what are the seven categories for the CCLA/Room151 Impact Awards? Here they are room151.co.uk/impact-awards/… #localgov #finance #outcomes

    Room151 1 day ago

    Why should LGPS be concerned about rising inflation?: The impact of the coronavirus pandemic, lockdown and wider economic uncertainty created  deflationary pressures which raise important considerations for the Local Government Pension Scheme writes… dlvr.it/RxF7Fs pic.twitter.com/JlcjROBIpz

    Room151 2 days ago

    JOB ALERT: LPFA Finance Director vacancy: London Pensions Fund Authority Finance Director and s151 Officer Competitive salary and benefits The largest Local Government Pension (LGPS) provider in London with around £6.5 billion of assets and 135[...] dlvr.it/RxBdJP

    Room151 2 days ago

    Richard Harbord: Further signs that local government finance is failing: The crisis in Liverpool and a fix for education budgets are further indication that local government finance is in need of a root and branch review. Even for those students[...] dlvr.it/Rx9PSV pic.twitter.com/sAanC2gEyu

    Room151 1 week ago

    Impact Awards: Finance helps launch school meals company and support business during lockdown: The CCLA/Room151 Impact Awards will showcase the way finance teams have a direct impact on their local communities and the environment. This week we spotlight… dlvr.it/RwnlF4 pic.twitter.com/AJhne1MVG4

    Room151 1 week ago

    "This work has made a vital, practical contribution to ensuring people have been supported through the pandemic." #impact #151awards #covid #s151 room151.co.uk/treasury/impac… #impactcasestudies #councilfinancemakesadifference

    Room151 1 week ago

    room151.co.uk/impact-awards/ #passiton #localgov #s151 #151awards pic.twitter.com/A0uO0dwBkM

    Room151 2 weeks ago

    Financial pressures loom for 2023 and beyond: Kate Ogden writes the government has addressed most of the short-term Covid-19 financial pressures facing English councils, but problems loom in 2022-23 and the years following. As we enter the[...] dlvr.it/RwfDsz pic.twitter.com/hpv2R09w75

    Room151 2 weeks ago

    Calling all #localgov finance officers and #s151s room151.co.uk/impact-awards/ It's the #151Awards Thanks to the @LGALocalism for helping us get the word out along with all the LA treasury societies. pic.twitter.com/Nkal9BrH1J

  • Categories

    • 151 News
    • Agent 151
    • Blogs
    • Chris Buss
    • Cllr John Clancy
    • Dan Bates
    • David Crum
    • David Green
    • Development
    • Forum
    • Funding
    • Graham Liddell
    • Ian O'Donnell
    • Interviews
    • Jackie Shute
    • James Bevan
    • Jobs
    • LGPSi
    • Mark Finnegan
    • Recent Posts
    • Resources
    • Richard Harbord
    • Stephen Fitzgerald
    • Stephen Sheen
    • Steve Bishop
    • Technical
    • Treasury
    • Uncategorized
  • Archives

    • 2021
    • 2020
    • 2019
    • 2018
    • 2017
    • 2016
    • 2015
    • 2014
    • 2013
    • 2012
    • 2011
  • Previous story News roundup: LGPS pool’s global infrastructure fund, business rates to ditch RPI plan, £1bn spent on property
  • Next story Agent 151: Grenfell inquiry must look at government housing policy

© Copyright 2021 Room 151. Typegrid Theme by WPBandit.