A flexible approach to pooling will yield better results for the Local Government Pension Scheme, says Aon Hewitt’s Dave Lyons.

Action points

  • Ensure effective governance structures, processes and procedures are being established to align, protect and successfully deliver the interests of the various stakeholders in the investment pool

  • Check how the investment strategy objectives of the various administering authorities will physically be delivered and how pension committees need to communicate these to the investment pool

  • Find out if the administering authorities and pension committees in the investment pool are committed, engaged and informed enough so that they fully understand what to expect from the investment pool  

However, let’s be clear, the consolidation of the English and Welsh LGPS funds into investment pools has been described as the creation of British wealth funds.

This is not so – they are neither British (they only impact England and Wales, not Scotland) nor wealth funds (they are not national surplus; they are the pension savings of people that will typically provide a modest supplement to their state pension).

To work in practice, investment pooling requires the draft investment regulations, which were recently consulted upon, to be laid before parliament and passed into legislation, to remove the prevailing investment limits on certain types of investment.

Administering authorities will need to have regard to best practice, government guidance and the potential provision for the secretary of state to intervene in their investment function, although seemingly not in that of an investment pool itself.

Perhaps an infrastructure lifetime Isa would be a better way of unlocking the potential for UK infrastructure investment

So, what does this mean? The guidance provided thus far states that the objectives of investment pooling are as follows:

  1. Asset pool(s) that achieve the benefits of scale

  2. Strong governance and decision-making

  3. Reduced costs and excellent value for money

  4. An improved capacity and capability to invest in infrastructure

All of these are admirable, but some might be better achieved through a more flexible approach. 

For example, improved capability to invest in infrastructure might be best delivered at a ‘supra-pool’ level.

It does not make sense for the current eight proposed investment pools to develop infrastructure investment expertise eight times over given the associated costs. It makes more sense for this expertise to be shared across the investment pools.

In fact, perhaps an infrastructure lifetime Isa would be a better way of unlocking the potential for UK infrastructure investment, based on a rational decision by the individual end investor and the quality of the infrastructure investment opportunities available.

Similarly, joint procurement, for example in the appointment of a passive manager across several LGPS funds, should not be dismissed.

This has been demonstrated to be a more effective means of reducing costs, through the material repricing of accessing index-tracking strategies to new unprecedented low levels.

Effective governance is central

Let’s not forget that investment pooling remains controversial – certainly with many pension committees that are unhappy with the removal from their remit of investment manager monitoring, selection and deselection.

In reality, not much changes for pension committees, even though they are only left with one implementation decision under investment pooling – which investment pool to be part of.

Therefore, effective governance is central to delivering successful outcomes, in terms of the successful management of the relationships between:

  • the different administering authorities within an investment pool;

  • the administering authorities and the investment pool itself;

  • the investment pool and their pension committee clients; and

  • the communication and buy-in between each administering authority and their pension committee while the investment pool is being established.

The language by which each pension committee describes their requirements of the investment strategy to be delivered by their investment pool – different approaches, and overly simplistic, versus overly complex approaches, will equally pose challenges.

Many other questions remain. Should pools:

  • establish a platform or rent a platform;

  • appoint a range of managers/funds or ‘white label’ funds;

  • leave transition costs outside of the investment pool or internalise them;

  • choose life funds or authorised contractual schemes?

  • How are conflicts of interest managed?

  • How do you deliver value for money and multiple investment objectives?

  • Can the challenge of meeting government requirements of achieving scale be met quickly, while delivering successful outcomes?

Even with the July 15 deadline for the submission of detailed investment pooling proposals to government, there is unlikely to be a one-size-fits-all approach, and a substantial part of the detail is still to be determined.

Dave Lyons is head of public sector investment consulting at Aon Hewitt

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