Devil’s in the detail when it comes to pooling
Local Government Pension Schemes and the wider pensions industry have warned of a host of issues associated with asset pooling, in response to a government consultation.
Tight deadline could create investment risk
The government’s proposed deadline for Local Government Pension Scheme (LGPS) asset pooling is too tight, the Pensions and Lifetime Savings Industry (PLSA) has warned.
Making the asset transition to pools by March 2025 would create considerable investment risks and operational challenges, said the PLSA.
The transition of assets should be done in an efficient and well governed manner, without creating artificial timelines which could negatively affect their value, the industry body warned.
Instead, funds should create plans for the transition of their assets into pools and explain – in detail – why any assets will remain outside of the pools.
Tiffany Tsang, the PLSA’s head of DB, LGPS & investment, said: “Given the substantial cost savings already obtained from transitioning LGPS assets to larger asset pools, it is entirely sensible to explore whether new policy intervention might result in further gains. Similarly, given that the LGPS already invests extensively in levelling up and private equity it is right to explore whether more investment to these objectives is achievable.
“However, the core objective of the LGPS remains paramount: securing assets with an appropriate risk profile to be able to fulfil pension obligations to members. Therefore, it is important that both further consolidation and investment targets should only be undertaken if they align with the fiduciary duty to invest in the interests of scheme members.”
By contrast, the London Pension Fund Authority voiced its support for the government’s suggested deadline. Its consultation response read: “Yes, LPFA supports the setting of a March 2025 deadline on the transition of listed Fund assets to LGPS pools. LPFA would note that deadlines have previously been helpful in accelerating the pace of reform in the sector.”
The LPFA did qualify that a March 2026 deadline could be “equally valid”, to allow the local government funds to complete their actuarial valuations in March 2025 as planned, and then refine their investment strategies over the course of the following year, which is normal practice.
The illusion of pooling still exists in some parts of the LGPS
While supportive of the benefits of investment pooling and proud of its own track record in this area, the London Pension Fund Authority (LPFA) warned in its consultation response that inefficiencies remain under the surface, even where assets appear to be pooled.
The LPFA’s response said: “… shifts towards pooling, even if well-intentioned, remain slow and often at surface level with Funds continuing with individual strategies and investment decision making within pools. The inefficiencies of multiple agencies and funds are being masked by the veneer of pooling with many Funds still making individual investment decisions but simply holding the investment within a pool “wrapper”.
It added: “Many Funds continue to operate models that proliferate asset offerings, replicate processes and embed inefficiencies in pools. This approach undermines the purpose and benefits of pooling.”
The government should steer clear of investment strategy
The government discusses access to private markets in its consultation. It should avoid getting too prescriptive about where schemes should invest, warned the Border to Coast Pensions Partnership, which manages investments on behalf of 11 partner funds.
Border to Coast’s response read: “Border to Coast already has a significant private markets programme representing c. 20% of Partner Fund assets. The consultation’s reference to private equity is unnecessarily narrow and could have unintended consequences; we suggest a broader definition of private growth capital, alongside confirmation that this can be global in nature.”
The LPFA echoed these concerns. It said: “It is important to remember that the primary purpose of any pension scheme (including the LGPS) is to ensure that its members receive the pensions for which they have worked and which they deserve. This must be the criteria against which those charged with governing each Fund should make decisions.
“We do not believe, therefore, that any investment decisions should be mandated to reflect political policies, objectives, priorities or views, whether international, national or local. Ultimately, “levelling-up” is a government initiative and, regardless of how worthy, should not in itself be a measure against which LGPS investments should be determined.”
The consultation closed on the 2 October 2023.
