Doug McMurdo: LGPS, the Stewardship Code, good governance and protecting capital

I have spent the last decade leading Bedfordshire Pension Fund (BPF) as chairman of the pensions committee. We are facing many challenges, not least the reforms that the Local Government Pension Scheme (LGPS) has undergone, whilst ensuring that our pensioners and members have confidence that the liabilities will be paid, as and when the fall due.

There are only three income streams: employee contributions, employer contributions and returns on investment net of fees. Whilst the first two, are prescribed, the latter is clearly a challenge for any pension committee to get right and still confront the external pressures that we increasingly find ourselves facing.

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BPF is one of the smaller pension fund in the LGPS but we remain focused and determined to ensure we have the best investments, risk adjusted, to meet our long term forecast liabilities.

Our membership, active, deferred and pensioners, continues to grow which brings about serious considerations for cash flow forecasts.

Complexity

In addition to this, we have found the administration of our fund becoming increasingly complex for a variety of reasons. One is the increase in the number of employers. 

BPF has three local authority employers—Bedford Borough, Central Bedfordshire and Luton Borough Council—all of which contract out services to the third sector (charities) and third party contractors.

The second, and more significant, is the dynamics of our education services, which has presented a significant challenge to our administration function. As a result of the increase in employers, the fund has increased by 30% over the last five years.

Investments are often described in ways that many would not relate to. The lay person can be easily confused and unnecessarily so. It is therefore important that committee members are familiar with the various instruments available to us, and attend appropriate training programmes and seminars.

Whilst there is a view, held by some, that divesting is the answer that is not a position the fund holds.

Over time, I have witnessed changes to our investment thinking, and development of our investment beliefs. One objective we set ourselves is to protect the capital deployed. However, it is necessary to take some investment risk, appropriate to the risk appetite the fund sets out through its investment beliefs and investment strategy statement.

Increasingly, we focus considerable time and effort on “good governance”. This does not stop at the specific (internal) fund activity; we go beyond the fund and seek to engage with the managers we invest through, or directly with the companies we invest in.

This exposes us to discussions on climate change, single use plastics, human capital issues, environmental devastation (tailings dams and palm oil/deforestation) to mention a few.

Climate

I am abundantly aware of the climate challenge we face and a considerable amount of the fund’s time is spent on that critical topic. Whilst there is a view, held by some, that divesting is the answer that is not a position the fund holds.

However, there are several considerations, not least to proactively and positively, engage with companies that are seen to be less interested in this area.

Earlier this decade, it was central government’s intention to amalgamate the LGPS’s assets and they set out some very clear criterion. This is described in the LGPS draft guidance.

The result of this was that the government brought in new legislation. The original criteria aimed at developing “pool companies” taking account of the following:

• Asset pool(s) that achieve the benefits of scale
• Strong governance and decision making
• Reduced costs and excellent value for money
• An improved capacity and capability to invest in infrastructure

Bedfordshire Pension Fund (BPF) gave this matter very serious consideration and decided to join Border to Coast Pension Partnership. We have been instrumental, with others, in developing an operating company which, in simple terms, operates as a fund manager on our behalf.

In total there are 12 underlying funds (including BPF) that are equal shareholders in the company which is regulated by the Financial Conduct Authority.

One objective we set ourselves is to protect the capital deployed. However, it is necessary to take some investment risk, appropriate to the risk appetite the fund sets out through its investment beliefs and investment strategy statement.

Whilst the total assets under management is around £47bn, the transfer of assets from the twelve partner funds is a planned transition, whilst the company builds the sub-fund platform.

Presently BPF have around £200m in the pool company with further commitments for the future.

We have significant challenges facing the fund, not least the new Stewardship Code, which is under serious consideration. Climate change is, without doubt, a significant consideration for us going forward and it is therefore imperative that we embed this into our decision making processes.

It is also very important that we communicate effectively with all our stakeholders, embers and employers. The McLoud pension ruling in relation to the Judicial Pension Scheme and the Firefighter’s Pension Scheme (2016 & 2017 respectively), will have consequences for the LGPS and we clearly need to be cognisant of the financial consequences.

In closing, the past many years have been a serious challenge. Going forward, I am confident the challenges and opportunities will only be different and more demanding. External scrutiny is increasingly more prominent. Responsible investment and ESG issues will remain extremely important to delivering good outcomes for Bedfordshire Pension Fund.