The Local Government Pension Scheme submitted initial proposals for asset pooling last week, but talks between funds are ongoing as the scheme works to meet government benchmarks.
The publication of the government’s criteria for collaborative investment in late November challenged funds across the scheme to pull together and draw up initial plans.
There are currently eight pooling vehicles at variant stages of development, but funds could opt to submit either individual or joint proposals to fulfill Friday's deadline; fully refined submissions are due by July 15.
Whilst we agree with the government’s proposals for pooling there is a risk that such broad powers, combined with the lack of an explicit fiduciary duty, could be used by future governments to direct what and where funds invest
Joanne Segars, PLSA
London Pension Fund Authority and Lancashire County Pension Fund were early movers in the shift to collaboration, announcing plans for an £11bn Asset Liability Management Partnership well ahead of the government consultation on pooling.
But in a joint submission released on Friday, the group stated: “We… recognise the ALM Partnership will be required to expand its pool to achieve government’s target criteria.”
According to the submission, “early stage” talks are currently underway with Greater Manchester, Merseyside, West Yorkshire and Berkshire pension funds over a potential £35bn tie-up.
“The next steps between now and July are for all participants to develop a proposal around how the pooling arrangement will work and meet government’s criteria,” the submission states.
“All parties anticipate the discussions reaching a successful conclusion,” it continues, while a source close to the Greater Manchester Pension Fund said the proposal had not yet been confirmed.
Strong collaboration but doubts remain
Barry McKay, partner at consultancy Hymans Robertson, said the amount of work that has gone into planning efforts across the scheme is evidence of the strong collaboration between funds.
“Most funds have tried to find others who are like-minded in terms of philosophy of investment,” he said, adding that the route to developing in-roads into infrastructure remained unclear.
Addressing governance across the newly formed pools, McKay said a board composed of representatives from each pool would help drive further collaboration and best practice.
“At the higher level, these representatives could share best practice insights into why their [pool] has done well,” he said.
William Bourne, director at independent advisory City Noble, said it was “almost inconceivable” that all pools will perform well, while those with well-developed in-house teams have an advantage.
“It’s so much cheaper,” he said. “The models more likely to succeed are those closest to the private sector model.”
However, he added that meaningful cost savings were unlikely to be delivered within a 10-year time frame due to the high cost of implementing Financial Conduct Authority-regulated structures, an additional layer of governance, and facilitating the transfer of large volumes of assets.
Consultation deadline
The government's consultation on LGPS investment regulations also came to a close last week.
Formed of two main proposals, the consultation sought industry views on the removal of prescribed limits on means of establishing a well-diversified portfolio in favour of adoption of the ‘prudent person’ approach.
The introduction of a legislative backstop or safety measure, allowing the secretary of state to intervene in the investment function of administering authorities, was also proposed.
Responding to the consultation, Joanne Segars, chief executive of the Pensions and Lifetime Savings Association, said the investment regulations need to better recognise the “ultimate purpose” of LGPS assets – namely to pay members’ benefits.
“Whilst we agree with the government’s proposals for pooling there is a risk that such broad powers, combined with the lack of an explicit fiduciary duty, could be used by future governments to direct what and where funds invest,” she said.
