London CIV’s plan for restructured investment options meets resistance
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London LGPS funds have voiced concerns over investment responsibilities under reform plans proposed by the London Collective Investment Vehicle (LCIV).
The capital’s Local Government Pension Scheme pool is currently consulting on proposals to shake-up its governance and investment regime following a critical review released last year.
In response to the review, the LCIV has put forward a simplified model, giving funds a choice of three blended investment mandates in addition to a separate passive option.
The consultation document says: “Our assessment of the current model indicates that it will not achieve the 50bp per annum target originally specified.
“Almost no discretion has been granted to the LCIV to achieve the 35bp improved investment performance.”
It also said that sub-funds cannot be launched without sufficient seed money, which “creates delays and potentially leads to high ‘opportunity costs’.”
In a radical overhaul, the CIV proposes that investment options will be reduced to three strategies.
The first, dubbed “low cost” would combine passive equity funds with a “liability aware fund”.
The second, “basic”, option would divide 11 sub-funds into three baskets covering equity, fixed income and real assets which London authorities could allocate assets between.
The third “enhanced” option would mirror the second, with the CIV given greater powers on execution, tactical asset allocation, rebalancing and hedging.
Needs
However, a number of funds have voiced worries that the proposals would reduce their ability to allocate assets according to their needs.
A report to councillors drafted by Mark Maidment, London Borough of Wandsworth’s deputy chief executive and director of resources, said: “The concern is that asset allocation is the major contributor to fund performance and by forcing a blended option on individual funds this may negate any efficiency saving, create a de facto passive mandate and hinder their specific requirements.
“The blended option as portrayed will mean the CIV will allocate investments as it sees fit and not in accordance with individual funds strategic and/or specific requirements.”
Nigel Cook, head of pensions investments at London Borough of Croydon, said the CIV’s proposal “seems to imply that the local authority’s investment strategy will be subordinated to the choices made by the CIV, and the pension committee will have to be prepared to compromise”.
He added: “This runs counter to the government guidance on drafting and adopting an investment strategy statement (ISS), and the autonomy and statutory obligations of individual pension committees in respect of their individual authorities.”
Non-blended
A number of authorities are supporting the inclusion of a fourth non-blended mandate, an option proposed by the Society of London Treasurers according to Havering Council’s consultation response.
Maidment’s report said this would mean that “each manager within the pool would have a separate investment focus (e.g. income, growth, low carbon, concentrated/diverse, geographically focussed, etc.).”
Karen Shackleton, senior adviser at MJ Hudson Allenbridge, told Room151: “I do have some reservations about the blended solution, in that the limited number of sub-funds does not, at first sight, appear to offer the London boroughs sufficient flexibility to tailor their strategic asset allocation to their own fund-specific needs.
“For example, meeting cash-flow needs, diversifying equity risk without further compromising liquidity, or rolling out a low carbon investment strategy.
“However, the London CIV has asked for feedback from the London boroughs as part of its consultation process, so hopefully these concerns will be addressed following on from that discussion.”
Elsewhere in his response, Cook raised concerns about a statement within the consultation that “the CIV will not be able to accommodate individual environmental, social and governance (ESG) policies for each London local authority (LLA)”.
Cook said that this was “problematic and not acceptable”, suggesting instead a qualified majority approach to deciding ESG policy within the pool, and a “proactive approach” of creating sub-products that address different LLAs’ ESG requirements.
Consultation responses showed greater support from individual funds for proposals to reform the governance of the CIV.
The proposals would see a slimmed-down consultative shareholder group of 12 treasurers and pension chairs, along with two general meetings a year for all funds.
Cook said the governance recommendations should make it easier for the CIV to operate and mean a “less bulky and unwieldy oversight structure”, but warned that “reduced representation will bring its own challenges and there is little detail on how a consensus would be reached”.
A statement provided to Room151 by a London CIV spokesperson, said: “London CIV is a pioneer in establishing pooled arrangements and we are now taking stock of how best to deliver the original vision for the CIV in the light of the wider changes that are happening in local authority pension fund management.
“We are having discussions with our stakeholders about how we respond to the governance review and no decisions have been taken as yet.
“As we are engaging with our stakeholders and listening to their views we do not want to prematurely anticipate the variety of possible responses that could result.”
The CIV’s proposals are set to be discussed by London council leaders later this month.
