Shire funds ‘keeping options open’ for asset pooling

The seven Shire funds – Cheshire, Leicestershire, Nottinghamshire, Shropshire, Staffordshire, Warwickshire and Worcestershire – are expected to save more than 50 per cent on fees via the pooled arrangement with Legal & General Investment Management, which covers UK and global passive equities, passive fixed income and smart beta strategies. 

It may be something comes of this collaboration that then leads into further pooling, but we are looking at other options as well, we are keeping our options open

Simon Cunnington, Nottinghamshire Pension Fund

The release of the government’s criteria for collaborative investment across the LGPS last week provided some much needed clarity on how its 89 funds should move towards aggregation of assets. 

However, the Shires group began discussing collaborative investment ahead of George Osborne’s announcement in July of plans to create six “British wealth funds” aimed at driving economies of scale and investment in infrastructure.

Simon Cunnington, investments manager at Nottinghamshire Pension Fund, said the arrangement had achieved the government’s ultimate aim of reducing fees, but was not necessarily part of Nottingham’s longer-term pooling plans. 

“We, and I’m sure most of the other funds involved, are talking to various other funds,” he said.

“[It] may be something comes of this collaboration that then leads into further pooling but we are looking at other options as well, we are keeping our options open.”

Keeping options open

The government has timetabled the transfer of more liquid assets to six pooling mechanisms for April 2018.

Cunnington said it was currently unclear as to whether a collaborative procurement such as the Shires’ deal with LGIM would be permissible under the government’s pooling requirements.

“It may well have a role within the wider pooling discussions, it may not,” said Cunnington.

“It shows if nothing else that we can collaborate and hopefully we will find a route that works to satisfy the government.”

Justin Bridges, head of treasury and pensions at Shropshire council, said its plans for pooling were still under discussion.

“We don’t know what the pools will look like,” he said. “Other discussions are going on with other groups.”

Step change

Collaboration has been at the epicentre of discussions across the scheme since consultancy Hymans Robertson’s 2013 structural analysisof the LGPS quantified the savings that could be made through greater use of passive investing via collective investment vehicles.

Dave Lyons, principal at consultancy Aon Hewitt, said several groups of funds, including the Shires, funds in the southeast, the southwest and in Wales, have already done a lot of work towards collaboration, but much of it may turn out to be just an “interim step”.

“Against a rather uncertain backdrop lots of funds did have conversations and some have got together,” said Lyons.

“Now, with the benefit of clarification from [the Department for Communities and Local Government] it looks like it might just be an interim step.”

We don’t know what the pools will look like. Other discussions are going on with other groups

Justin Bridges, Shropshire Council

On the flip side, many funds have postponed making decisions or delayed implementing previous decisions due to uncertainty about what may lie ahead.

Lyons said: “It's only natural that without more guidance [funds] are going to head off in slightly the wrong direction or take a step that looks like it needs to be built on, to achieve what the government wants.”

Backstop legislation

The government also issued a consultation last week on plans to revoke regulations on the management and investment of LGPS funds, introduced in 2009, and replace them with a ‘prudent person’ approach.

The consultation also proposes the introduction of a legislative backstop or safety measure, allowing the secretary of state to intervene in the investment function of administering authorities.

However, Lyons said it would be difficult to reconcile the backstop measure with the fiduciary responsibility of local pensions committees.

“If the secretary of state is going to intervene in a fund’s investment strategy, I’m not quite sure how that sits against the fiduciary responsibility for the local pension committee… I could see it being settled in the courts,” he said.

“Is the responsibility then going to sit with government if it goes wrong, or is it going to sit with the local pensions committee who have been directed to do something by the secretary of state?”