LGPS landscape: Collaboration in the South West

On a sunny day in Cornwall in early June officers from the eight South West LGPS Funds, Avon, Cornwall, Devon, Dorset, The Environment Agency, Gloucester, Somerset and Wiltshire sat down for one of our regular six-monthly meetings.

The South West Investment Managers (SWIM) group has been meeting at least twice a year for around 15 years, and had successfully worked together on a number of projects, including a framework contract for legal advice, which when concluded in 2006, was unusual, if not unique, within the LGPS. We followed this work a couple of years later with a framework contract for actuaries and investment consultants.

It was against this background of successful work, that the subject of greater collaboration around funds’ investments was discussed in June.

The subject had been discussed previously, and it was generally accepted that it would be a good thing to do, but as is so often the case, the day job tended to get in the way.

The discussion this time centred particularly on the apparent lack of activity from central government since the call for evidence and subsequent consultations, and the generally held view that the topic of LGPS restructuring was unlikely to remain off the agenda for much longer; it was time that we started considering what we could do.

Only a few weeks later the keen eyed amongst us (not including me) spotted the now infamous wording in the Budget book that the government would work with the LGPS to ensure that investments were pooled.

Brunel

After the announcement there was a flurry of emails and given previous discussions around the issues and our successes at previous collaborations a plan was hatched and the seeds of Project Brunel were planted. It quickly became apparent that there was a need for us to be swift, and so a first meeting was held within a month of the Chancellor’s budget.

Important to these initial and on-going discussions were a number of key drivers. Whilst the government agenda has been the catalyst, we are clear it needs to deliver in a number of areas to qualify as a success.

It is understood that the government’s criteria will be size, governance and savings. It is also understood that there is likely to be an additional requirement around infrastructure investing.

In addition to these government driven criteria, we feel that key to the process is to maintain and improve investment returns; improve, where possible, the governance process; and ultimately reduce deficit levels.

When we started discussing the proposal we looked at what we felt were key differentiating factors for our proposal.

I have already mentioned the history of working together, but I feel its worth repeating, as the trust that this has given us is very important to the project working. Another key factor was the similarity of size of the funds in the South West – there is no one dominant fund, it really is a partnership of equals.

The inclusion of the Environment Agency within the group adds another interesting dynamic, given their specific investment principles.

I feel that the significant amount of excellent work that the Environment Agency fund has done over the years around sustainable and socially responsible investing is an additional key differentiating factor for our proposal.

This will allow those funds, such as Dorset,  that have little or no focus on sustainable or responsible investing to leverage the Environment Agency’s experience and implement where appropriate.

However, I think it is also worth adding that whilst that gives us significant opportunities, it is not something that will be driving the work of Project Brunel, more a useful additional feature.

Feedback

We have acknowledged that, with assets of around £19 Billion at the last count, we are probably a bit smaller than the £25 – £30bn being suggested by the government as optimum for pooling. However, we have received positive feedback on the work that we have undertaken so far.

We have also said that we are open to the potential for other, like-minded, funds joining us. We have, in addition, recognised that one of the key benefits of the proposal is that with only eight funds involved we are able to maintain the element of control and nimbleness that would be tricky should that number rise by too many.

Our feel is that around 10-12 funds would be about right in operational terms, and would probably get us somewhere close to £25bn in assets. We feel that the proposals, as they stand at the moment will enable each of the participating funds the opportunity to retain a good degree of control over their own destiny, and we are keen to maintain this.

Vehicles

We have made significant progress since we started our discussions, only a few weeks ago. Each fund has presented the initial proposals for collaboration to its pension fund committees and they all agreed in principle. The work that has been going on since this agreement is to put some “flesh on the bones” of the proposal, and work out exactly how we would structure the pooled investments.

There have been discussions around the type of vehicle that is used. The Authorised Contractual Scheme (ACS) had been adopted by the London CIV and has certain benefits.

There is also the potential to setup a Joint Committee, which has different characteristics and therefore benefits.

I believe that there are positives and negatives for each option, and it will be up to us to assess the most appropriate for the South West. Whilst the London CIV decided that a particular approach was the most appropriate for them, it may or may not be the best for us.

It is clear that it will need a lot of hard work and require appropriate professional advice from consultants, lawyers and other specialists with experience in setting up complex structures.

We must ensure that we factor all of this in when we are assessing the costs and benefits of the proposals. However, given the potential savings that are being talked about I believe that it is imperative that we ensure that the project is appropriately resourced to deliver the benefits.  

I think that the amount of progress that has been made in less than four months since the Chancellor’s budget and only 12 weeks since we first came together in the middle of August is amazing.

It is great credit to all involved that we have moved so positively and swiftly, and each Fund has played a key part, which I think is also key going forward, a chain (or in this case grouping) is only as good as its weakest link, and I don’t believe we have any of those.  I would like to make one specific mention at this stage to my colleague Matthew Trebilcock from the Cornwall Fund for taking the lead, and ensuring that the project stays on track, this has been invaluable.

In conclusion, whilst there is clearly a great deal more work to do, given the strong foundations that have been built I feel that in engineering Project Brunel we should be able to position the South West funds very favourably, and be able to achieve our long term goals.

Nick Buckland is head of treasury and pensions, Dorset County Pension Fund.

Photo (cropped): Guiseppe Milo, Flickr.