Raisin expectations: Waltham Forest’s LGPS advisor talks to Room151

John Raisin, MBA, is the independent investment advisor to the London Borough of Waltham Pension. He is CIPFA qualified and holds the Investment Management Certificate.

Room 151: What is your background in local authority finance and what are you up to now?

John Raisin: I was an Assistant Director in Scotland and later CFO of both Northamptonshire County Council and the London Borough of Waltham Forest. I am now independent advisor to the Waltham Forest Pension Fund.

R151: What extra input can an independent adviser bring to a local authority pension fund?

JR: It should be a broad role and it should be an involved role. It’s not just about investment advice. A genuinely independent adviser should bring insight into governance, actuarial issues, the future of the pension scheme, constructively challenge the investment consultants and help reduce the costs of the fund by ensuring that it only uses investment consultants as and when they are really needed.

It’s all about good governance. In 2008 Watson Wyatt produced a report suggesting that governance is the most important issue facing pension funds and I think that is true. They are becoming ever more complicated: new governance requirements have been introduced into the LGPS in the last five or six years and, as Hutton indicated, governance will become even more important. The days when the advisor was just there to look at investment issues should be behind us.

In investment terms local government pension funds have become much more complex and will become more so in the future. They’ve moved from less than ten years ago being invested primarily in UK quoted equities and traditional bond products to now having a greater emphasis on global equities, a lower overall allocation to equities and more interest in alternatives – I think that the average now is 9% in alternatives excluding property across the LGPS. That is going up and I think it will go up further. A broad range of fixed income products has been added to or replaced traditional bond products. Infrastructure is an asset class which because of income generating potential will become increasingly used by funds as we go forward.

There is a danger sometimes that the investment consultant, if they are not controlled, can come to have too much influence. They are important and can do some things that no one else can do such as provide research on managers. However they are not independent. A truly independent advisor doesn’t have anything to sell but the consultant might advise a change in asset allocation which would result in fees for them. There’s not necessarily anything wrong with that, but it is helpful to have someone stand back and ask: is that the right approach?

One of the things I was appointed by Waltham Forrest specifically to do is reduce the cost of the fund. With investment consultants you can use them as much or as little as you like and I don’t believe that they need to be involved in every single meeting for example. They should be there when they are directly needed to advise. Challenging them over things like this improves governance.

Room 151: LGPS ( Local Government Pension Scheme) reform is round the corner now – how do you think it will play out?

JR: I think it’s a massive opportunity, not a threat. There has been a lot of negativity from the press about public sector pensions. I think the 2008 scheme was unsustainable from the start. They didn’t address the fundamental issues of cost v benefits. The agreement and the principles that were reached in November 2011 between CLG, the employers and unions I think provide the opportunity to build for the long term.

Career average has been controversial but for most employees it’s not disadvantageous and could be potentially beneficial. And it removes any criticism that some of the press has made about final salary.

And the second issue is the fact that there is zero contribution increase for the vast majority of employees. I think that if there is reduction in the accrual rate from the present one sixtieth downwards that isn’t something that we should worry about too much. There seems to be little doubt that an increase in contribution, particularly at a time when public sector employees have had their pay frozen, in some cases reduced, would be far more dangerous to the scheme than it would be to reduce the accrual rate. People are interested in what is in their pay packet now rather than in the future.

Room 151: Do you think that local government is doing its bit to communicate the benefits of membership to the LGPS?

JR: Some funds have been very good at communication. Others haven’t been as good. Communication of the new fund is crucial. This whole issue of ‘if you increase the employee’s contribution people will opt out’ might not have become such an issue if the scheme had been properly communicated in the past and the trade unions could more easily have been countered because actually the scheme is an incredible employee benefit.

Many of my friends work in the private sector and there if you get a 10% contribution from your employer on a DC scheme where there is no guarantee of the future benefit you are lucky. Many people get little or nothing from their employers.

So it’s a fantastic benefit for people but we do need to communicate that. Indeed I would say that it is almost the most important thing that needs to happen when the new scheme is introduced. We must very actively communicate to the employees the benefits of membership.

Room 151: What trends are you seeing emerging in LGPS asset allocation?

JR: Well ten years ago we moved from people having balanced management to having specialist management because it was thought that the balanced managers couldn’t manage all asset classes.

In respect of asset classes, as I said earlier, lower allocations to equities have been occurring for some years and this trend will I think continue, although equities will continue to be an important asset class as the scheme is an open defined benefit scheme. In terms of the increasing trend towards alternatives, I think if alternatives are going to have a real meaning they need to be a good proportion of the fund and not just represent single digit allocations

Also the growing interest in absolute return strategies and capital preservation is notable. Bond products are far more diverse than just a few years ago.

We have to make sure that with alternatives we are genuinely diversified from equities. For example if a hedge fund has a large underlying exposure to equity risk for example then is it really a diversifier? I think not. Also we need to remember that alternatives tend to be much more illiquid than traditional quoted equities and fixed income products, and the fees are higher. However if an alternative is a genuine diversifier we should be seriously considering it. Although we need to remember that correlations between asset classes are not static and that they do change.

Funds have to understand exactly what they are getting into though and, for instance, we quite rightly have a trend toward infrastructure at the moment and that is potentially a good asset for local authorities, with positive income flows over a long period. But there are many types of infrastructure product you could go into and people need to think carefully.

Room 151: Do LGPS funds need to manage their liabilities?

JR: They do through actuarial valuation and then they bring together their funding strategy statements to manage liabilities. Should the LGPS go down the Liability Driven Investment (LDI) route, using swaps etc? That is a matter for the individual fund.

My feeling is that actuarial valuation means that every three years we see where we are and we draw up a funding strategy in response to that. I don’t see LDI as nearly so relevant to the LGPS as to many private schemes. The LGPS is still an open scheme and, resulting from the recent Hutton report and the November 2011 tri-partite agreement, it seems that it will remain open for the foreseeable future. So that mitigates considerably against LDI as utilised widely by private sector schemes. Also, at the moment would you want to enter into LDI with the level that gilts are at? I don’t think that for the various reasons I’ve mentioned it will be widely used by local government funds in the near future although a few have utilised LDI and clearly in those cases they will have considered the issue carefully and decided it was right for them.