Private sector consolidators can learn from LGPS pooling

The advantages are significant. It gives pension funds the opportunity to benefit from increased scale, which can reduce costs, open access to a wider range of asset classes, and streamline investment governance activity.

Pension scheme members also stand to gain, with greater reassurance that their retirement pots remain safe and well-managed, a particularly important consideration as the repercussions of the Covid-19 crisis continue to be felt. 

Shared knowledge and collaboration is central to the sector’s survival and, despite the perceived commercial barriers in DB schemes, consolidation may be exactly what the DB market needs

In theory, consolidation of private DB schemes on any scale is good news for securing the future of the sector. On top of the benefits above, when executed well it can also encourage further innovation and collaboration between providers, leading to better service and outcomes for members.

There are, however, many factors that need to be considered if the private sector is to succeed in scheme consolidation. 

The journey the private sector will need to follow has been well-trodden by Local Pensions Partnership and other Local Government Pension Scheme pools. And there are some valuable lessons the private sector can learn from our experience. 

Effective operational management is crucial

Consolidation is about more than simply pooling assets. When funds consolidate, it impacts the entire business. From changing management team structures and practical office logistics to information management systems and member engagement programmes, every part of running a pension service will be touched by this development.

As we celebrate our fourth birthday, LPP is now moving into a period of growth and innovation. Up to now, our focus has been on building a sustainable business, which performs well throughout.

This has largely been achieved by ensuring that front and back-office functions are fully addressed, leaving no holes in the onboarding process and ongoing management. 

Those considering this journey need a clear strategy and tactical plan that equips the business to adapt and respond to changing conditions, rather than a fixed plan that follows a single path.

Critical in managing this are the stewardship and governance arrangements. We spent many weeks discussing governance policy, process and implementation prior to forming the partnership.

One of our most important decisions — which became our distinguishing trademark — was to fully delegate investment decision-making to a large, professionally staffed team working within our regulated investment management business.

This enabled and now drives efficient and effective execution of investment management activity alongside a collegiate development of our operational business activities.

Data quality unlocks better member engagement 

Consolidating vast amounts of member data is challenging. Pension funds typically develop their own systems and methods of controlling scheme data, which can restrict the style and nature of member engagement programmes.

Integrating different systems in a way that enhances all member experiences is an enormous undertaking.

As an industry, we are endeavouring to innovate member engagement and communications to meet the needs of future demographics, and which help address critical situations such as Covid-19.

Data management systems that are intuitive, flexible and can easily adapt to the future demands of pension scheme clients and members, and potentially further consolidation, are vital to any pooling business. 

Clear investment management guidance  

The partners of any consolidation service would need to decide on the investment management platform that suits their needs: from completely in-house, to completely outsourced, or, like LPP, a combination of the two.

It is vital that the service has the very best investment capabilities at its disposal, bringing together talented experts, best-in-class investment opportunities, and effective cost management to deliver expected outcomes for members.

Stakeholders are the main benefactors, with greater transparency and accountability, and a stronger focus on responsible investment and asset ownership, stewardship and reporting obligations as they continue to evolve.

Sustainability and responsible investment must be the core of all future investment philosophy.

Be agile and responsive to changing needs 

The pensions landscape is evolving rapidly. The changing needs of members are forcing schemes, regulators and providers to escalate innovation to match this pace of evolution.

In the short time that LPP has been live, our members have placed greater importance on responsible investment, tailored engagement experiences, and responding to pension transfer demands.

We have adapted our business to respond to these shifting objectives, and aim to be even more agile in the future, a trait superfunds will also need to display.

Share wisdom and collaborate 

The success of the LGPS pooled model is largely down to collaboration. As a small community of UK pools, we are quite collegiate and co-operative.

At LPP, we increasingly look at international experience, drawing on best practice from Canada, Australia and elsewhere, and assessing how this can help us to improve.

Shared knowledge and collaboration is central to the sector’s survival and, despite the perceived commercial barriers in DB schemes, consolidation may be exactly what the DB market needs.

Chris Rule is chief executive of Local Pensions Partnership