Pooling assets across the Local Government Pension Scheme could ultimately deliver annual savings of £190m-£300m, according to new analysis that goes some way to giving LGPS funds much-needed clarity.
With plans well underway for a radical overhaul of LGPS investment, 2016 is set to be remarkable year for the sector.
Chancellor George Osborne’s announcement last year of plans to create six “British wealth funds” put the wheels of reform in motion.
Estimated cost savings
Source: Joint Working Group of Local Authorities
LGPS funds can see how this will work now, the local accountability for asset allocation, efficiency in the pooling of assets – that’s become much clearer through this piece of work
Mark Wynn, Cheshire Pension Fund
Under pooling criteria issued in November, administering authorities were required to submit an initial proposal detailing their plans to the government by February 19.
Funds will ultimately need to pool all of their assets, with only “minimal” exemptions allowed.
They must then submit a refined and completed proposal, detailing plans at both an individual and collective level, by July 15 2016.
Project POOL
Last September, a working group of 24 local authorities, with input from experts across 13 additional funds, began work on an analysis of the scheme – known as Project POOL – aiming to provide a joint response to government on the best way to pool investment.
A report published by the group today concludes that between six and eight multi-asset pools is the optimal structure to deliver cost savings.
The proposed approach will deliver estimated annual savings of £190m–£300m over the longer term, according to the report.
But beyond a few “quick wins” through joint procurement of passive investment, it may take 10 years for cost savings to reach these levels, said Barry McKay, partner at consultancy Hymans Robertson and adviser to the working party.
“It will take time to get up and running,” he said.
John Wright, head of public sector pensions at Hymans Robertson, said the working party had assessed a number of legal complexities.
“An [authorised contractual scheme] is great for liquid assets like listed equities, but with less liquid assets, such as private equity and infrastructure, it’s a bit more problematic because of... regulatory requirements,” he said.
“There is not one single pooled vehicle that can house all of the different types of assets.”
Project provides clarity
Mark Wynn, head of finance at Cheshire Pension Fund, said the project had provided the LGPS with some much-needed clarity.
“LGPS funds can see how this will work now – they can see the local accountability for asset allocation, they can see there is efficiency in the pooling of assets – that’s become much clearer through this piece of work,” he said.
A major focus of the government’s agenda has been on infrastructure investment.
Greater benefits are likely to be gained via a national platform, according to the Project POOL analysis.
Dave Lyons, head of public sector pensions at consultancy Aon Hewitt, said the challenge for the scheme would now be to hone what that platform would look like.
“I suspect there will be... more appetite from the pools to take control of investing in infrastructure,” he said, adding that bringing infrastructure investment in-house would bring down fees but would require significant investment in talent.
“It’s likely to require quite considerable investment to deliver that through an LGPS-owned infrastructure platform.”
John Hanratty, partner at law firm Nabarro, said the scheme was at the start of a "long road".
"The risks of transitions of assets at this stage must not be underestimated... but over the long-term the risks are probably worth taking," he said.
