Pool cue: New guidance set to change LGPS landscape

Draft statutory guidance for pooling within the Local Government Pension Scheme (LGPS) could see funds testing the limits of their responsibilities in the courts, says Nick Vickers

Whilst it may not have been particularly welcome to LGPS administering authorities, the government’s push for LGPS pooling looks as if it has made substantial progress in much of England and Wales.

Thinking back to Fawlty Towers and “not mentioning the war”I am going to be very polite and not make any reference to those pools where not a great deal seems to have happened, or the areas where encouraging participation appears akin to herding cats.

My first involvement with pooling was at a meeting of the Local Government Association in August 2015 and my personal view was wholly antipathetic.

Why did the Kent Fund need this? What possible purpose could it serve? What was it going to add?

A Date for Your Diary
Room151’s LGPS Asset Allocation Forum
November 7th, 2019, The London Stock Exchange
Register your interest…

I also thought that – remarkably after all these years of the LGPS flying under the radar – the Treasury and the then DCLG had actually realised that local authorities across the country were actually investing huge amounts of pension fund money on a global basis and they couldn’t possibly be doing it properly so they needed to intervene.

And I’ve double checked. It was three secretary of states ago, and of course before George Osborne moved in to journalism. A very different time.

For Kent, the journey, starting with the excellent collaborative work which Hymans Robertson kicked off in 2015, meant a pretty easy move in to working with nine other county councils plus the Isle of Wight unitary, and the watch words were “like minded”.

That has worked out to be the case.

The collaboration between the 11 Councils in the ACCESS pool has worked remarkably well and the procurement of Link as our operator is an excellent proof of concept.

Billions of pounds are moving in to the new structure and we also undertook a highly successful passive manager appointment with very significant savings being made.

All of which could have been achieved through collaborative procurement, an approach that the DCLG didn’t accept as going far enough.

So, against that backdrop, the LGPS Statutory Guidance on Asset Pooling published on 3 January does seem to be a curious move by MHCLG which one would imagine is pretty satisfied overall on the progress made by the eight pools.

And as ever with these things, once the stone is dropped the ripples will be interesting.

So, for example how does the “statutory guidance” sit alongside the statutory responsibilities of administering authorities to manage their funds in the manner they see fit?

That is a pretty fundamental question which I would have thought some administering authorities may wish to test with the legal profession and even ultimately in the courts.

So, let’s take an example where an individual fund has a highly successful mainstream equity mandate with an excellent investment performance and an acceptable fee structure.

If the pool company doesn’t for some reason want to bring that manager on to their platform, or the manager doesn’t want to go on it, does that fund have to sack the manager or can they retain them outside of the pool?

The 2016 guidance would have allowed this – 7(2)(d) to be precise including a value for money hurdle – but that has all gone now.

In fact the consultation document specifically states that 7(2)(d) is replaced with new wording:

“…all administering authorities must pool their assets”

And:

“in order to maximize the benefits of scale, pool members must appoint a pool company or companies to implement their investment strategies”.

And I guess someone in the Treasury still wants to push passive management so we have:

“pool members….should regularly review the balance between active and passive management….They should consider moving from active to passive management where active management has not generated better net performance”.

Well at least the administering authority still has responsibility for asset allocation and investment strategy.

Or does it in light of:

“providing pool members with asset allocation choices through an excessively wide range of pool vehicles or investment managers will restrict the pool company’s ability to use scale to drive up value”?

I assume “drive up value” means go cheap?

And finally, so that we are all clear on the direction of travel: “from 2020 when new investment strategies are in place, pool members should make new investments outside the pool only in very limited circumstances”.

I think MHCLG should look forward to some very interesting responses from administering authorities.

Nick Vickers is the business partner (Pension Fund) at Kent County Council and chief financial officer at Swale Borough Council. The views expressed are his own and not the views of either council.