The London Collective Investment Vehicle has announced a number of upgrades to its governance structures in response to personnel changes, but local authority participants still have fundamental concerns about how investing in the pool will work.
Conceived as early as 2012 by London borough councils as a voluntary pool, the CIV has now had to update its blueprint since participants in the Local Government Pension Scheme were mandated to pool in 2015.
A Willis Towers Watson review of the pool’s governance reportedly identified a lack of trust in the level of representation for the individual boroughs who are the shareholders of the new venture.
Funds are going to find inevitably they do need to make compromises on their investment strategy to enable the pools to operate in an efficient way
Kirsty Bartlett, Squire Patton Boggs
Fears over governance have been amplified by the departure of London CIV’s chief executive Hugh Grover, who had more than a decade of experience working with local government.
Chief investment officer Julian Pendock has also resigned, alongside client relationship director Jill Davys.
A boost to governance
In response, Mark Hyde Harrison, Grover’s interim replacement and a former head of DC strategy at Willis Towers Watson, submitted an improved governance structure to the CIV’s sectoral joint committee, which facilitates shareholder engagement, on Wednesday.
The changes will see the committee itself dissolved, to be replaced by a new consultative quarterly meeting of six local authority pension chairs and six treasurers.
All 33 London local authorities will be invited to biannual general meetings to approve the CIV’s accounts and medium-term financial strategy.
Meanwhile the CIV’s board will be bolstered with “at least one or two additional board members representing the LLA community”. All the proposed changes were supported by the majority of boroughs at consultation phases.
“We are actively taking on board the findings of our governance review and are developing recommendations with our colleagues in the boroughs that we will put to London borough leaders in March,” said Hyde Harrison.
“London was a pioneer in establishing [a] pooled arrangement and it makes sense to take stock now on 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,” he added.
Investment offerings have disappointed
If the governance measures seem to have the approval of the 33 boroughs, the CIV will still have to find a remedy for discontent with its proposed investment offerings.
Several boroughs have expressed frustration with the current options of ‘low cost’, ‘basic’ and ‘enhanced’ services.
‘Low cost’ customers would choose their own passive and liability-driven funds from the CIV platform, and manage their allocation and rebalancing. The CIV would ensure the funds are suitable and scrutinise LDI managers.
‘Basic’ arrangements would see boroughs decide strategic and tactical asset allocation to blended mandates developed by the CIV for each core asset class. The pool would also be responsible for manager selection.
‘Enhanced’ services could see the CIV take charge of everything but strategic asset allocation.
Responding to the proposals, Sutton council said the ‘basic’ build will likely be the most popular, given the boroughs’ differing funding levels and cash flow requirements, but that this threw up problems.
It added that simple blended buckets across core asset classes only would not allow funds to make decisions around issues such as geographical restrictions, cash flow requirements and responsible investment approaches.
“Additionally, there are concerns that the use of a single, multi-manager ‘bucket’ for each core asset class is likely to result in the creation of a passive proxy, with active management fees. Funds would prefer to have a range of options available, with varying risk/return profiles and returns net of fees,” the borough said.
Put plans on ice
The London Borough of Havering echoed the concerns, and called for the proposals to be put on hold until the LCIV had built confidence and trust with all London boroughs and had a more experienced team in place.
“The options are not sufficiently granular to allow funds to implement their strategic asset allocations,” wrote Cllr John Crowder, chairman of the pensions committee. “It goes beyond what we have seen in other pools and while some provide advice on strategic issues, we are not aware of others that have discretionary asset allocation powers.”
Not all of the London boroughs are diametrically opposed to the plans, said Karen Shackleton, senior adviser at consultancy MJ Hudson Allenbridge.
“There are a few funds that have a big problem with the proposed structure,” she said. “The majority I think could see it working, but they would like a little bit more choice.”
Shackleton said she hoped the CIV would be aware of the danger of creating closet trackers with its blended funds, and added it had listened to the boroughs’ individual concerns.
Funds have to let go
To some extent, local authorities will have to accept a loss of some control when agreeing pooling arrangements.
“I do think funds are going to find inevitably they do need to make compromises on their investment strategy to enable the pools to operate in an efficient way,” said Kirsty Bartlett, partner at law firm Squire Patton Boggs.
Bartlett said the introduction of shareholder representation could help to bring about the trust needed for greater delegation.
Shackleton agreed, and said that the enhanced option was the “right direction of travel”, but that it was too early for funds to be comfortable.
“This is the way things will go, that gradually we will move more and more decision-making towards the pools, but at the same time they have got to prove themselves first.”
