In-house management and infrastructure dominate LGPS pooling debate

The debate on pooling is intensifying as schemes prepare to present their plans to the government next month, ahead of the mid-July deadline for detailed proposals.

Some are embracing the change, but questions remain about how much schemes should outsource, and whether infrastructure  investment is necessarily in the best interest of members.

Speaking at a Pensions Expert event this week, Mike Jensen, co-chief investment officer at LGPS pool the Local Pensions Partnership, discussed pooling saying that there are “substantial systematic changes” to be made in order to deal with low inflation, and that pooling can help.

He added that, as pooling proceeds, asset allocation decisions should remain with the funds. Separation of powers is something that should have been emphasised more in the past, he said, but pension funds need to use the reforms to do so now.

I’m worried that infrastructure is taking over the LGPS debate. We have to get ourselves established first

Hugh Grover, London CIV

Skip McMullan, non-executive director at the LPP, said that Financial Conduct Authority support has “opened the route” for more schemes to merge assets, but warned that pooling “will not work if all funds try to maintain their status quo” and resist making compromises.

McMullan added that as pooling proceeds it is important to keep members informed, and a fund’s decision-making process “should never be a mystery”, especially during reforms.

Kunal Oak, head of product development and management at Aviva Investors, cautioned that “there are extensive costs in pooling” in some circumstances, schemes should ask themselves where it makes sense to pool.

In-house management decisions

As pooling proceeds, more assets might move in-house to save on management fees. Paddy Dowdall, assistant executive director at the Greater Manchester Pension Fund, said that internal management of alternative assets is “an obvious way to reduce costs” in pooled schemes.

But Hugh Grover, chief executive at the London Collective Investment Vehicle, pointed out that while an existing in-house arrangement can be the “most economic” option, creating a new one might be unjustifiably costly.

McMullan noted that deciding to insource is never a “black-and-white” matter. To be effective, he said, a pooled scheme’s strategy should be a mix of internal and external management.

He stressed that member benefits should always drive decisions: “Make sure you can pay pensions when they fall due – the rest is mechanics.”

McMullan added that as pooled schemes bring assets in-house, “fund managers will struggle”. He said the industry has been “cushy” for a long time, and would inevitably be impacted by pooling.

Oak agreed that “consolidation will always put pressure on the survivors” among external managers.

He suggested that pooled funds should only consider moving asset management in-house once a “critical mass of assets” is reached through consolidation.  

Infrastructure investment hurdles

At the same event, pensions minister Ros Altmann reiterated the government’s desire that LGPS funds increase their infrastructure investments.

The panellists conceded that the asset class has potential, but expressed some reservations. 

Dowdall said increasing scale helps with infrastructure – more so than equities – which is becoming a more prominent issue as pension funds merge and grow.

Grover said that while infrastructure can be a good LGPS investment, at the moment the government “has no levers to make us invest in infrastructure”.

He continued: “I’m worried that infrastructure is taking over the LGPS debate… we have to get ourselves established first.”

Jensen said if the government would like to see both the public and the private sectors investing in infrastructure, through both pooled and direct vehicles, it would need to provide greater clarity for potential investors on the risks involved.

A lack of infrastructure investment is a “UK-wide problem, not just for the LGPS”, he observed.

McMullan warned that it would not benefit all schemes to increase their infrastructure exposure.

He said UK schemes often “don’t have the necessary firepower for such projects” compared with other countries, an issue that should be rectified before infrastructure allocations can reasonably be increased.