The Access pool of the Local Government Pension Scheme is looking into renting a provider for the structure of its investment vehicle, but there are different options for pools depending on how much they want to outsource.
LGPS funds are due to pool their investments from April 1 2018. Before doing so, they have to discuss whether they will opt for the ‘build’ approach, which involves creating an in-house operating company from scratch, or rent a platform and agree on how many additional resources they would like to outsource.
Renting is effectively hiring a regulated operator to provide a platform for your investment funds
Dave Lyons, Aon Hewitt
Officers of the Access group came to the conclusion that they “didn’t have the experience and capacity for the build ‘max’ option”, according to the minutes of a recent pension fund committee meeting for the Isle of Wight, which is part of the pool comprising pension funds from central, eastern and southern England.
However, the document adds that “an element of influence from the pool was essential”, so what was described as the rent ‘max’ option has also been ruled out.
The committee discussed the ‘build light’ and ‘rent light’ options, and decided on a draft recommendation to rent with conditions.
Creating your own structure
Dave Lyons, head of public sector investment consulting at Aon Hewitt, said the terms ‘max’ and ‘light’ used by the Access pool are not necessarily employed by other LGPS pools.
He said that what the Isle of Wight calls the ‘build max’ option, which is what the Local Pensions Partnership and London Collective Investment Vehicle have done, would involve a pool essentially establishing its own fund management business.
“On the other end of the spectrum, there are some [pools] looking to do something a little less formal and build something without quite the complexity of having set up all of the different elements that are required in a full-blown fund management business,” said Lyons.
Lyons said this option is a “much lighter touch” and will fall under the build light category, involving the delivery of “some kind of common investment structure through a joint committee”.
Outsourcing to a provider
Renting will sit somewhere between the build max and build light approaches, and is “effectively hiring a regulated operator to provide a platform for your investment funds and [to] create the pool”, Lyons explained.
The rent max approach is similar to the build max option, the difference being that the regulated entity at the heart of the investment pool will be outsourced, while under the build max approach it would be created by the investment pool itself, Lyons said.
The ABC of pooling structures
Authorised unit trust
Open-ended investment company
Limited partnership
Authorised contractual scheme (can take the form of a limited partnership or a co-ownership scheme)
Unit-linked life assurance fund
What is an Authorised Contractual Scheme?
ACSs are regulated by the FCA and can be set up as:
Undertakings for collective investment in transferable securities
Non-UCITS retail scheme
Qualified investor scheme
Sources: PwC, Legal & General Investment Management
The rent light option involves looking for a provider that can offer a platform for the pooled investments to sit on. Lyons said this means creating the infrastructure and governance framework within the pool and overseeing, and potentially even directing the operator providing the platform.
Ultimately, he said, “renting a platform is relatively straightforward”. It may be chosen due to a pool feeling that it does not have the internal resources to be able to build something from scratch, making it preferable to procure an external provider.
Lyons added that building a completely new platform is quite different and involves creating an operating company, seeking the appropriate authorisation from the Financial Conduct Authority, choosing the required regulated staff and thinking about IT infrastructure and other supporting services.
Not all asset classes are equal
Karen Shackleton, LGPS independent adviser, said the decision to outsource certain asset classes to external asset managers can depend on how complex and time-consuming it is to manage them.
For example, a pool may decide to outsource alternative assets because they are more complex and require a greater degree of due diligence, she said.
“The expertise that’s required to review alternative assets is going to be more expensive for them to buy in and build themselves,” she added. “So I’d imagine that the rent light option includes that sort of consideration.”
Shackleton said that if a pool decides to go for the rent option, “it does require some rigour… in terms of making sure that you’ve got the right provider”.
