Mike O’Donnell: ‘progress on LGPS asset pooling needs to go further and faster’

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The CEO at the London CIV pension pool has called for progress on pooling the assets of the Local Government Pension Scheme (LGPS) to accelerate.

Mike O’Donnell told Room151: “The speed of transition to pooling needs to increase. Good progress has been made, but it needs to go further and faster.”

O’Donnell’s comments follow remarks made by Teresa Clay, head of local government pensions for the Department for Levelling Up, Housing and Communities (DLUHC), that ministers are growing impatient with the pooling project.

Speaking at the Pensions and Lifetime Savings Association’s (PLSA) local authority conference, Clay said: “Ministers are very focused on their goals and there is a level of impatience about the progress so far.

“It is recognised what a huge effort is being undertaken and what has been delivered, but there is some impatience on progress.”

Clay said this is because roughly a fifth of LGPS assets is yet to be pooled. She added that half of the system’s £342bn worth of assets is now managed by one of the pools or transitioning to a pooled arrangement, and a further third are in passive strategies that had been jointly procured.

The LGPS comprises 86 pension funds and has been working to pool its assets since 2016, with the process expected to take 15 years.

Teresa Clay: Ministers are very focused on their goals and there is a level of impatience about the progress so far.

Commercial property

O’Donnell attributed the slow progress to a lack of consolidation of investments and collaboration between funds in areas such as commercial property investments.

He told Room151: “It is not just about getting the pools to increase in size, but also the way in which individual investments are decided and that there is consolidation and collaboration on this between pension funds.

“We [London CIV] have 32 shareholders but all too often it feels like 32 separate conversations with 32 clients, rather than those clients working together to create a strategy to deliver a smaller number of investments, reduce costs and increase performance.”

He also highlighted that out of the 32 London LGPS funds managed by London CIV there were more than 25 asset managers employed for commercial property investments and no assets pooled within the organisation so far.

Mike ‘Donnell: We have 32 shareholders but all too often it feels like 32 separate conversations with 32 clients, rather than those clients working together to create a strategy to deliver a smaller number of investments, reduce costs and increase performance.

DLUHC delays

O’Donnell also attributed the slow progress to an absence of a clear strategy and framework from DLUHC. Clay said government guidelines and rules on pooling will be announced later this year and may include a timeline for remaining assets moving to pool in the future.

“We are going to hopefully get that guidance before the end of the year, but it does need to set a very clear framework for further progress on pooling,” said O’Donnell.

Ministers say each pool should aim to reach between £40bn and £50bn in total assets to fully benefit from economies of scale, which O’ Donnell says is not achievable on the current trajectory.

He said: “There are eight pools in the LGPS, and eight is probably not going to get you there. We [London CIV] have potential assets under management of £45bn but only about £27bn at the moment. None of us will get there without some proper consolidation between pools.”

Rachel Elwell, CEO of Border to Coast pension fund, offered a different perspective. She told Room151: “Having pooled some £47bn of their £60bn of investments, due to deliver over £250m of cost savings, with a £10bn Private Markets programme and an active Responsible Investment strategy delivered via Border to Coast, our partner funds have delivered on the original objectives of pooling – ahead of time and under budget.

“From experience around the world, there is potential to continue to work together to bring even more value to the LGPS, and we look forward to working with our partner funds, the wider LGPS and the asset management and asset owner industry to explore how we collectively make the most from pooling.”

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