Welsh local authority pension funds have made progress on mapping the road towards pooling their assets, but along with their peers are awaiting further details on the criteria around governance, size and cost.
Pressure on the Local Government Pension Scheme to cut costs and drive efficiency by pooling assets has ramped up over recent weeks.
Greater Gwent pools UK equity allocation
Greater Gwent pension fund sought cost efficiencies with a shift out of segregated equities into a pooled mandate last year.
The fund transferred its £246m passively managed UK equity allocation into a pooled mandate in a “house-keeping” sweep of the scheme’s assets.
Gwent had previously run this portion of passive equities, worth more than 10 per cent of the fund’s total assets, in a segregated arrangement but took advantage of the savings to be made by transferring into a pooled mandate under the same manager.
Paul Rowles, investment manager at Gwent, said the move brought the fund’s UK equity holdings with asset manager BlackRock in line with its pooled mandates run by other management houses.
“Part of our equity allocation was segregated, we decided to… take advantage of a pooled fund that would give us some improvements from a fee point of view but still keep our UK equity allocation as it stood in an overall sense,” he said.
“We wouldn’t have made the change unless we could see there were advantages from a fee point of view there – it was an opportunity.”
A Q&A released by the LGPS Advisory Board in September showed the government expects its proposals, due for release later this autumn, will be “realised within the lifetime of this parliament”.
The board said: “The intention is for all LGPS assets to be pooled, there will not be exemptions for any fund... Criteria for investment pools will include some detail on governance, size and cost, but it will be up to LGPS funds to work together to uphold proposed investment pools against the criteria.”
All-Wales pooling
LGPS funds in Wales have been working with the Society of Welsh Treasurers Pensions Sub Group since 2010 to develop their response to the call for economies of scale, which include exploring the pooling of passive equities.
At a meeting in June the SWT Pensions Sub Group said the next steps for the Welsh collective would include:
Engaging with pensions committees across the eight Welsh funds
The procurement of a strategic partner to assist in the subsequent appointment of a provider to deliver governance and operational support.
Establishing a sub group of investment officers to look at a single passive provider for passive global equities to obtain immediate cost savings.
Addressing developments over recent weeks, an update from Gwent’s pensions committee said Welsh funds need to focus on establishing a shared set of principles for collaboration.
It highlighted SWT concerns that an all-Wales pooling project – with combined assets of £10bn-£12bn – may not meet the government’s desired benchmark of £30bn for collated assets.
The Welsh collective questioned how the savings would be measured or defined in line with proposals to sustain local accountability in cases of pooling or collaborative decision-making.
Barry McKay, partner at consultancy Hymans Robertson, said there was a political case for the Welsh funds to work together and pool assets.
“They’ve been proactive in doing something together,” he said. “Whether the government will accept that is something else.”
They’ve been proactive in doing something together. Whether the government will accept that is something else
Barry McKay
A complex picture
A lack of detail on the government’s criteria for pooling assets has sparked rumours and conflicting information across the LGPS.
Hugh Grover, chief executive officer for London’s Collective Investment Vehicle, in which several boroughs have joined forces to gain economies of scale, said: “It is all really, really vague,” adding that the future shape and structure of LGPS asset pooling is a complex picture.
“The only people who really know what is happening are the civil servants in the DCLG [Department for Communities and Local Government],” he said.
However, Grover said that while there is “geographic logic” to Welsh collaboration the £25bn-£30bn minimum government benchmark is “arbitrary”. He said: “The [government’s] quantum criteria might not be appropriate to the geographic criteria of that group.”
Steve Simkins, head of public sector pensions at consultancy KPMG, said ending up with five or six funds to serve the UK would provide the necessary economies of scale while at the same time diversifying the risks of political “tampering” and sustaining regional influence.
“If you work back from one big fund... five or six funds diversifies the possibility of London running the show, it gives the regions some continued political control,” he said.
Kieran Quinn, chair of Greater Manchester Pension Fund said it is important for "like-minded" funds who share common objectives to work together.
"Collaborative projects that can produce savings for LGPS employers and taxpayers shouldn’t be constrained by geography alone," said Quinn.
"However, working with your neighbours can bring benefits. GMPF allocates 5 per cent of its assets to local investments which have the twin aims of commercial returns and supporting the local area. We have delivered these local investments not just inGreater Manchester but across the wider North West and this provides a natural route for collaboration with the other North West funds by sharing knowledge and best practice."
