Q&A with Hugh Grover on collective investments and the LGPS

In February, London Councils backed the business case for a new collective investment vehicles. Hugh Grover, the organisation’s director of fair funding, performance and procurement, talks to Room151 about how the plans are progressing, and how they might fit alongside DCLG proposals to reform LGPS structures.

Room151: How many councils are now signed up to the London CIV?

Hugh Grover: There are three stages to the signing up process. Already, 28 boroughs have said that they agree with the principle and that they are willing to pay £25,000 to pay for implementation measures, such as the appointment of advisors.

The second level of sign up is decision-making being taken through each individual borough’s political processes. We now have 22 councils who have agreed to setting up the company to run the CIV and to appoint people to become directors. We are still waiting to hear from a 23rd, and we expect this one and another six to be on board after the local elections. Four have decided not to engage at that level.

Later this year we will go to all of the boroughs that have agreed to become fully engaged as shareholders in the company. We will only approach them when we have a clearer view as to what the mandates will be.

R151: What else will happen before then?

HG: There is shedloads of detail to get through. We are hoping in the next few weeks to get the company registered with Companies House. We are currently thinking about chief officer roles – what we will need and what would be sensible. We are trying to keep the company as light touch as possible.

We are also talking to a number of investment managers about scale and starting to do some analysis where councils might currently have common mandates and what sub-funds the company might create. If one of the managers has a mandate with five or six councils all currently investing, it would be sensible to move them across to the CIV.

R151: What level of assets does the CIV need to succeed?

HG: We have figures, but the only thing I know is that they are likely to be wrong. That is not because we have deliberately produced mistaken numbers, but because it is difficult to get to the bottom of the costs. I would like to think that we will get to £5 billion quite quickly – and even possibly start at that level. Whether we will ever reach 100% of all councils’ current investments is questionable – some will always have a desire to invest elsewhere.

R151: What mandates with the CIV invest in?

HG: It is all to play for. We are likely to start from the position of trying to bring in current mandates if a few councils are invested through the same manager. If one borough has one unique mandate it won’t go in. Other boroughs might look at a mandate and see that the fees are cheaper through the CIV and then decide to join.

R151: Are you concerned by the DCLG’s recent proposals which could end active investment in listed assets?

HG: It it is worth saying that the CIV itself as and when it comes into existence won’t take any view on these kind of matters. It will provide a platform that speaks to the needs of the boroughs. Personally, and I am a relatively recent entrant to the pensions market, I think it is a shame to close down an element of flexibility. I would rather see the CIV be allowed to operate for a while then return to the debate on passive and active – it is inevitable that CIVs are likely to reduce fees in themselves.

R151: Are you worried that the DCLG proposal for two CIVs does not mention a regional option?

HG: There needs to be a debate facilitated by DCLG on what CIVs will look like. I am not convinced that CIVs will always be the right answer for everyone and I am not convinced that there is any logic to having them split by types of investment. I don’t see why that would be necessary. A CIV in and of itself has a structure that allows investment in pretty much anything. We are pressing on with doing a regional CIV, and would encourage the government to allow us to do that regardless.

R151: Could the London CIV evolve into becoming a national vehicle?

HG: We have had a number of conversations about whether the London CIV would be open to other LGPS funds. We are structuring the CIV as an authorised contractual scheme (ACS), which means, in principal, any private or public sector organisation has the right to invest in it. We have to think about how we manage that. It is unlikely that the London boroughs ACS will want itself to be open to private sector investment, and there is some thinking to be done about how the CIV might respond to such a request. In principle, if other LGPS funds wanted to invest in one of the passive mandates, the principle is likely to be yes. Whether we would want to scale up to a national level is another question – we shouldn’t walk down that road without our eyes open and understanding the potential market impact.

R151: Have you discussed your CIV proposals with central government since it released its consultation into national LGPS structures?

HG: I have told them that we are delighted that they have seen the benefits of the work we have done in London and given us their endorsement. What we do need is much more of the detail to be filled in. DCLG also needs to engage with market and LGPS funds. The discussions we’ve had with some of the investment managers who serve the sector have been extremely helpful. It is an extremely complex area and each conversation raises a new issue.