Chancellor offers LGPS pools more time

Local Government Pension Schemes have been given five extra months by government to finalise their proposals for fund pooling.

The Department for Communities and Local Government (DCLG) yesterday published its criteria for the shape of the pools, which it said should total no more than six with a minimum of £25bn each.

Originally, councils faced a deadline of February to submit final proposals, but that timetable has now been moved back to July, with only initial proposals expected by February.

Jeff Houston, head of pensions at the Local Government Association, told Room151: “We are glad the government has listened to us. We told them there was no way that funds would be able to get approval for final proposals through their committees before February.

“There is still a hell of a lot of work to do on this.”

John Wright, head of public sector at Hymans Robertson, said: “Some funds are making progress with the ‘who’ as well, but it is right that the timetable allows some leeway for funds to work out the right groupings and partnerships to get the best outcomes for the long term.

“The timetable makes some allowance for this but we should remember that the aim should be to identify the best proposals for the long term and taking time to get this right will pay dividends in the future.”

An analysis commissioned by government from consultancy PricewaterhouseCoopers indicates that pooling mechanisms can be established within 18 months.

It said that liquid assets could be transferred over a relatively short timeframe, beginning in April 2018, but accepts that “illiquid assets are likely to transition over a longer period of time”.

However, William Bourne, director at pension adviser City Noble, warned that the timescale was still too short.

He said: “The experience of the London CIV and the LLPP (Lancashire and LPFA partnership) is that the proposed timing is extremely challenging.

“It will be even more so for pools comprising perhaps eight or ten authorities who may be widely separated geographically.”

In a document released yesterday, the DCLG made it clear that it would leave it to funds to determine their own governance structures, and would allow for both passive and active management.
It said: “The government recognises that both active and passive management have a role to play in the LGPS.

“However, authorities should only use active fund management where it can be shown to deliver value for money, and authorities should review how fees and net performance in each listed asset class compare to a passive index.”

Funds will, however, be required to explain the proportion of their fund they intend to invest in infrastructure, and their ambitions for the future.

Houston also indicated that more pools could yet emerge, in addition to the prospective ones already announced.

He said: “There are some discussions among funds in a ring around London. Wales also has its own proposal although it is up in the air as to whether this would be allowed – they currently only hold £12bn to £13bn.”

“One of the things we want to avoid is pools all assuming that they can meet the £25bn threshold just because they have been in discussions with a particular fund. For instance, Gloucestershire could go into any one of three or four.”

He added that discussions are continuing on how governance will work in practice, with some funds concerned about losing control over the selection of fund managers.

“If Greater Manchester goes into a pool with lots of smaller funds, then is it just one-fund-one-vote or is their weighting depending on the size of assets?” he said.

Bourne said: “The guidance hardly touches on the challenging issue of how elected councillors will be able to hold the pools accountable, beyond saying that authorities will need to set that out in their proposals. We still find it hard to envisage what an authority will do with an underperforming pool.

“Will they be able to move pools? Or sack the managers, who quite possibly under some structures would be officers in neighbouring authorities?”

Alongside the pooling criteria, the government also yesterday announced proposals to scrap current regulations placing caps on certain types of investment classes.

Instead, funds would be asked to publish an investment strategy statement allowing them to take a prudential approach.

Bourne said: “Under the new regime many of the specific 2009 investment regulations would be revoked. These include the restrictions on stock lending, the requirement to monitor performance of managers every three months, the requirement to use an adequate number of managers, and even the requirement to report against the Myners principles.

“We would have liked the criteria to include a test as to whether the proposed pooling would result in a better outcome for all pensioners. We remain concerned that while it may benefit those in poorer performing schemes, that may not be the case for the many in well-run ones.”