Question 1: Do you agree that all pools should be required to meet the minimum standards of pooling set out above?
We do not agree with the proposal that pools should meet with these minimum standards.
There is no evidence that it will lead to better outcomes for pensioners. The historic outcome of the LGPS in aggregate, as measured by annualised net value added over 10 years compares well with an international peer-group. i.e., NVA of 1.9% compared to a range from 0.4% (Alberta) to 2.1% (AP4 in Sweden). There may be other reasons for the proposed reforms, but they are not necessary from the perspective of achieving a better outcome, and they will inevitably involve substantial disruption.
We are also deeply concerned that these consolidation proposals rely on erroneous cost data given by the Pension Insurance Corporation to the DWP Select Committee in May 2023 (DBP0073). PIC cited CPPIB’s costs as 27bps, whereas the figure from CPPIB’s 2022 Report is 111bps. PIC only considered internal ‘operating’ costs and failed to include third-party manager or performance-related fees. The evidence also references the LGPS’s investment costs as 56bps whereas in fact the Scheme Advisory Board’s 2022 Annual Report gives a figure of 51bps.
PIC state in their evidence that CPPIB’s costs were £1bn lower than the LGPS, whereas in fact they were £1.5bn higher. They reasoned from this evidence that there are substantial cost savings to be made from consolidating the LGPS, but the data simply does not bear that construction. If the Canadian model is followed, costs are likely to be substantially higher, not lower. We can accept that LGPS costs are to an extent under-reported, but even the 25th percentile fund’s costs were 69bps in Fiscal 2024 (source SF3 data to March 24), compared to CPPIB’s 126bps (source 2024 Annual Report p45f).
None of the pools have a track record, resources or a proven skillset to provide investment advice, and there is no rationale or evidence to suggest that they will do a better job than the current arrangements. We accept there is some duplication in the provision of advice by consultants, but that could be solved through a framework agreement rather than wholesale reform. There is no evidence that the five pools which are FCA authorised entities are delivering better outcomes than those which are not. If anything, the reverse is the case.
While we recognise the Government’s determination to move ahead with pooling, there is no evidence to support these reform proposals. We therefore cannot agree with this statement.
Question 2: Do you agree that the investment strategy set by the administering authority should include high-level investment objectives, and optionally, a high-level strategic asset allocation, with all implementation activity delegated to the pool?
Again, the lack of evidence makes it hard for us to agree with this statement. There is no evidence at all that the implementation outcomes delivered by the pools either have been or will be superior to the aggregate historic performance. We accept that there are some stragglers whose performance could be improved, but that can be done without the significant disruption and costs which these reforms will involve.
No pool has any experience or track record of providing asset allocation advice, nor sufficient resource to deliver it. If the provision of investment strategy were put out to public tender, the lack of a track record means it is unlikely that any pool would be a successful tenderer. We therefore believe this proposal is flawed and could result in significant financial detriment to LGPS members.
We are also concerned that it will be difficult under this proposal for funds to express their particular circumstances e.g., cashflow requirements, duration, preference for passive or active management, engagement or divestment, through a single return objective.
Question 3: Do you agree that an investment strategy on this basis would be sufficient to meet the administering authority’s fiduciary duty?
Again, while we understand the Government’s intentions, we do not agree with this statement. If it were true, it would logically imply that the fiduciary duty to deliver the target return set by the administering authority would have passed to the pools, as is the case with private sector fiduciary managers.
But these proposals also give AAs a continuing duty to monitor pools, and they remain responsible for the administration and ultimately the payment of pensions. If that is the Government’s intention, we suggest that the following measures are necessary:
There should be a clear statement on exactly who has the fiduciary responsibility to pension fund members
Pools should be obliged to carry sufficient insurance to cater for an investment failure resulting in the AAs being unable to pay pensions (or the Government should explicitly underwrite them)
Funds’ ability to oversee and govern the pools needs to be strengthened considerably (please see our response to Qs 27 to 29 of this consultation response)
There should be a requirement to reprocure on a regular basis, as is the case with the private sector fiduciary managers
We believe that in fact the intention is for fiduciary duty to remain with the AAs. In which case we find this proposal uncomfortable: the AAs will only have limited and indirect powers (i.e., to sack the pool Board) to respond to a failure by the pool which results in higher employer or (through the operation of the cost cap) employee contributions.
Question 4: What are your views on the proposed template for strategic asset allocation in the investment strategy statement?
The template provided has some significant omissions and flaws:
There is no distinction between conventional and index linked bonds, which have different characteristics and perform different purposes within a portfolio
There is no scope for a fund to express its preference for active or passive investment
There is no scope for a fund to express its desire to invest in sustainable funds aiming at net zero
Most LGPS funds and consultants use high level objectives such as Growth, Income, Inflation Mitigation, Diversification, or Liquidity as a way of categorising assets into larger groupings. We would suggest that a template based on these groupings would be a better way to allow funds to express their high-level objectives. Pools could then run sub-funds defined by these objectives rather than by asset classes. There might be a need for more than one sub-fund for some groupings to cater for partner funds’ different risk appetites (e.g. a higher and a lower risk Growth sub-fund). This would have the following advantages:
funds could express their particular high-level investment objectives more accurately
pool products would be directly aligned with fund objectives
pools would make the asset allocation decisions across asset classes
there would be fewer sub-funds
Question 5: Do you agree that the pool should provide investment advice on the investment strategies of its partner AAs? Do you see that further advice or input would be necessary to be able to consider advice provided by the pool – if so, what form do you envisage this taking?
5 a) We recognise the Government’s intentions, but we cannot agree with this statement.
Most pools do not have the expertise or skillset to provide investment advice. This can be built up over time, but it will be essential that this proposal, if implemented, is phased in over several years. In practice, we question whether doing that would provide better outcomes or value for money than the current model of using experienced investment consultants and other advisers.
There is also a potential conflict of interest if the same entity is both providing asset allocation advice and managing the underlying vehicles which are to be used. We question, for example, whether for a particular asset class a pool would be prepared to allocate to a rival pool’s better performing sub-fund. In a bad case, they might choose not to include an asset class in a fund’s asset allocation strategy simply because they did not have a suitable sub-fund to implement it.
For these reasons we believe it is essential that, if this proposal is implemented, the pool’s advice is subject to challenge by and debate with an experienced consultant or adviser representing the partner fund.
5 b) The consultation uses the term 'principal advice', which is different from the term 'proper advice' used in the 2016 LGPS investment regulations. We would strongly recommend that if the wording is to be 'principal advice' it should be defined carefully so that it is clear whether or not it is the same as 'proper advice'.
As per our response to 5 a) we believe it is essential that if the pool is to be the principal source of advice to funds, it is subject to challenge by and debate with an experienced consultant or adviser representing the partner fund. The AA has ultimate fiduciary responsibility and should have the right to reject the pool's advice if the adviser was unable to agree it.
We firmly believe that letting the AA choose where to obtain principal/proper advice from would result in a better governance structure, because it avoids the conflicts of interest which this proposal results in. Each AA would always be at liberty to use the pool's services if they believed they represented best value for money.
Question 6: Do you agree that all pools should be established as investment management companies authorised by the FCA, and authorised to provide relevant advice?
We do not agree with this statement. There is no evidence so far from the existing pools that FCA authorised ones perform better than those who are not. For example, the Northern and Wales pools both have models which do not involve owning an authorised FCA. One outsources investment advice and, separately, the ACS structure; the other uses internal AA resources to provide it. Both are successful in terms of outcomes.
The experience from Australia is that the reporting requirements of regulators has placed a significant burden on the public sector pension funds both in terms of resources and expenses.
Question 7: Do you agree that administering authorities should be required to transfer all listed assets into pooled vehicles managed by their pool company.
In aggregate the long term returns on listed equities are likely to be similar whether managed by the pool or the fund. Many LGPS funds have negotiated competitive fee deals with their managers, either unilaterally or as part of an LGPS share class. Our experience is that pools are often unable to match these, even without regarding the costs which the pools themselves incur. We do not think it is reasonable or in line with their fiduciary duty to ask them to move, incurring transition costs, to their pool’s higher cost strategy. In aggregate we are sceptical that there will be significant cost savings, if any, from this proposal. We therefore see little benefit to doing this.
There are also issues where funds invest in strategies which their pool does not currently offer. Real examples from our clients include Diversified Growth Funds held for tactical asset allocation reasons, listed infrastructure held for diversification purposes, segregated gilt-edged funds held for cash-flow matching purposes, and a short-term corporate bond fund held for liquidity reasons. Losing the ability to invest in these strategies would be to the detriment of members.
Question 8: Do you agree that administering authorities should be required to transfer legacy illiquid investments to the management of the pool?
We assume the meaning of this question is that ownership would remain with the fund, but that management would transfer to the pool, and not that ownership would also transfer.
There is some merit in transferring these assets to the management of the pool where pools have developed the capacity and resources to taking on this responsibility. If the Government is determined to move ahead with pooling, we prefer this to the alternative of being forced to transfer ownership into a vehicle managed by the pool, which would incur very significant transition costs. But there are some pools where the capacity to do this is limited or non-existent, and they will therefore be forced to outsource this function. In which case the cost savings will be limited.
Question 9: What capacity and expertise would the pools need to develop to take on management of legacy assets of the partner funds and when could this be delivered?
The skills required would be i) monitoring ii) portfolio construction iii) dealing with restructuring and other corporate events (e.g., GP led secondary issues, co-investments etc). There is a case for developing or using existing centres of expertise inside one or two pools rather than each pool trying to reinvent the wheel.
Across the whole LGPS there are a material number of legacy assets and managers, and this may require significant resources not currently available within the pooling set up.
Question 10: Do you have views on the indicative timeline for implementation, with pools adopting the proposed characteristics and pooling being complete by March 2026?
We recognise the Government’s stated desire to achieve pooling more quickly, but in light of the lack of evidence to support the proposals we believe it would be wise to move slowly. The proposed timescale will lead to additional and unnecessary cost to LGPS funds. There are many reasons, some of which we list below:
15 months is not long enough for pools to have new entities authorised by the FCA.
Many pools have not yet set up the sub-funds required to implement 100% of their fund’s asset allocations. For example, ACCESS has no climate change impact funds; LGPS Central has no U.K. equity sub-fund.
Many pools do not have the quantity or quality of resources to perform the additional functions required under these proposals, such as asset allocation, managing legacy assets, advice, or doing due diligence on local investments under these proposals. As happened when the pools were originally set up, we are concerned that they may end up depleting the AAs further by taking their staff.
As pools do not yet have the full suite of sub-funds, this timescale will mean multiple transitions, all of which will incur costs.
Many private assets have fund lifetimes which stretch substantially beyond March 2026, in some cases for 15 or 20 years. There will be significant complexity and cost to transferring these on a compressed timescale.
Funds will find it hard to reconcile this timescale with maintaining their fiduciary duty to members and employers by doing their best to prevent significant financial detriment to them.
Other developments
Question 11: What scope is there to increase collaboration between pools, including the sharing of specialisms or specific local expertise? Are there any barriers to such collaboration?
We can understand the desire to share good practice and not to duplicate expertise unnecessarily.
We have concerns that the chain of ownership and accountability becomes unwieldy if a fund invests through its pool, which then uses another pool, which may in turn use an external manager to invest in a particular asset class. In practical terms it will become difficult, if not impossible, to hold the underlying manager properly to account, or to exercise duties of stewardship and responsible ownership.
The biggest barrier to collaboration is the lack of any incentive for pools to do so. We suggest that the best way to provide this is that pools should explicitly aim at a financial surplus (as LPPI does now). Profitability provides both a metric to evaluate options and an incentive to use another pool’s product if it offers better value for money. It also provides pools with a reason to go through the disruption of a merger between pools. Surplus profit would then be returned to shareholders by way of an annual dividend, so they get rewarded for their pool’s excellence.
Question 12: What potential is there for collaboration between partner funds in the same pool on issues such as administration and training? Are there other areas where greater collaboration could be beneficial?
We believe there is some potential for collaboration, but it should not be forced on AAs. The cost of administration is relatively small, and therefore any collaboration should be focused on achieving good practice and resilience through scale rather than saving costs.
There may also be some potential for sharing senior officer roles, as four London boroughs share Phil Triggs.
Chapter 3: Local investment
Proposals
Question 13: What are your views on the appropriate definition of ‘local investment’ for reporting purposes ?
We suggest that any definition is kept reasonably loose. For some pools, defining local as the pool area may restrict the opportunity set, reduce diversification (e.g., Wales), or be difficult because they lack contiguity (Borders to Coast, LPPI). Some funds are on the borders of a pool’s geographic area and may wish to invest in something the other side of a county boundary. It would be better to define local as the United Kingdom, with a stated (at the discretion of the pool’s partner funds) minimum percentage in the pool area.
Question 14: Do you agree that administering authorities should work with their Combined Authority, Mayoral Combined Authority, Combined County Authority, Corporate Joint Committee or with local authorities in areas where these do not exist, to identify suitable local investment opportunities, and to have regard to local growth plans and local growth priorities in setting their investment strategy? How would you envisage your pool would seek to achieve this?
We question whether pension fund officers are best placed to identify suitable local opportunities. Most AAs are keen to invest locally, and there is no lack of desire to do so. All local investment is ultimately driven by the set of opportunities, which in turn depends on the level of enterprise. Encouragement of enterprise at a national level is required to expand the opportunity set. That is a matter for Government policy, and outside the scope of this response. But without sufficient opportunities, funds will not be able to invest locally.
On the assumption that enterprise flourishes, the consultation rightly identifies that the problem is how to match local opportunities with finance. The barriers include mismatches of scale (local investments tend to be smaller), mismatches of risk appetite (pension funds have limited appetite for higher risk investments), concerns over conflict of interest, and lack of suitable expertise and resourcing.
Triage and due diligence may be better done at pool level, which would avoid duplication and eventually create a knowledge bank of investments across the pool. However, most pools have limited or zero resources or experience in this area today and would have to build them up. This will take time.
Question 15: Do you agree that administering authorities should set out their objectives on local investment, including a target range in their investment strategy statement?
This places an extra burden on already stretched AA resources. Pension fund officers may not necessarily have the local contacts and there is a risk of conflict of interest if local councillors become involved.
Whilst we recognise the government’s ambitions in this area, the current legal interpretation of fiduciary duty (Giffin Opinion, 2014) is clear that AAs must invest for the benefit of their beneficiaries, and not for any other purpose including political. The Government therefore cannot mandate investment to a particular asset class. Even setting a range might well be considered as ‘fettering the discretion’ of the AAs, which the 2014 Law Commission report found would be in conflict of fiduciary duty.
If a target range is set, it must be clearly understood that success in achieving it will depend on whether or not there are suitable local investment opportunities which deliver an appropriate financial return.
Question 16: Do you agree that pools should be required to develop the capability to carry out due diligence on local investment opportunities and to manage such investments?
There are some advantages to asking pools to carry out due diligence on local investments. They will be able to build up a bank of knowledge and experience which will help them to do due diligence efficiently. But we are not clear that this would be a more efficient way of managing local investments than outsourcing it to private sector managers.
Local investments tend to be relatively small in size, which may pose a problem for pools with greater AUM. They also require much the same due diligence as larger ones, which means the cost of due diligence per £ invested will be higher. There is a risk that having the pools do due diligence becomes a barrier to smaller local investments in particular.
Question 17: Do you agree that administering authorities should report on their local investments and their impact in their annual reports? What should be included in this reporting?
We are not convinced this proposal would add much value. Our view on impact investing is that it should not be separated out from mainstream investing i.e., the non-financial returns which may be generated, should be assessed alongside the financial returns from an investment.
The exact definition of local investments and the calculation methodology of impact are two other aspects which will have a significant effect on the usefulness of reporting in this area. Finally, this proposal would use up more of the already stretched resources of AAs without adding much value.
Chapter 4: Governance of funds and pools
Fund governance
Question 18: Do you agree with the overall approach to governance, which builds on the SAB’s Good Governance recommendations?
Yes, we do.
Question 19: Do you agree that administering authorities should be required to prepare and publish a governance and training strategy, including a conflict-of-interest policy?
In principle, we agree. AAs will already have a conflict-of-interest policy, as part of their local councils, which should cover pension fund administration too.
Question 20: Do you agree with the proposals regarding the appointment of a senior LGPS officer?
Yes.
Question 21: Do you agree that administering authorities should be required to prepare and publish an administration strategy?
Yes.
Question 22: Do you agree with the proposal to change the way in which strategies on governance and training, funding, administration and investments are published?
Yes. Anything which can make these policies more accessible to members will help transparency.
Question 23: Do you agree with the proposals regarding biennial independent governance reviews? What are your views on the format and assessment criteria?
23 a)We agree with the principle of independent governance reviews. We suggest that two years is too short a period and will place an excessive burden on all parties. We would propose that the interval should be either three years to fit in with the actuarial cycle or five years.
It is important that the review does not duplicate work already done by internal or external audit reviews.
23 b) We believe a national template would make it easier for assessors to understand whether the fund they are reviewing is out of line with national standards. It should cover:
Resourcing
Data quality and control
Compliance with legal governance requirements
Investment (and other) costs
Risk mitigation processes
Breaches and responses to breaches
Pool governance and oversight
Question 24: Do you agree with the proposal to require pension committee members to have appropriate knowledge and understanding?
Yes, but it would be wise to be more explicit about whether substitute members should be obliged to undergo training before voting in Committee.
Question 25: Do you agree with the proposal to require AAs to set out in their governance and training strategy how they will ensure that the new requirements on knowledge and understanding are met?
Yes.
Question 26: What are your views on whether to require administering authorities to appoint an independent person as adviser or member of the pension committee, or other ways to achieve the aim?
Broadly we support this approach. Oversight and governance of the pool is going to be crucial to the success or otherwise of the proposed reforms. There is a potential for conflict of interest if pools are both providing strategic allocation advice and also managing the underlying products which funds have to invest in. Pools will not be constrained by any direct fiduciary duty to pensioners whereas the funds do have fiduciary responsibility.
It will therefore be up to the latter to ensure the pool acts in the interest of pensioners. To cite three possible examples of conflict:
- A pool may wish to build up assets in a sub-fund and allocate a fund’s assets inappropriately to it
- A pool may not wish to use another pool’s products even though it offers better value for money
- A pool may use a flawed internal stochastic model (all models are wrong, but some are useful) without sufficient challenge leading to financial detriment
Funds also need to hold pools to account for the performance of individual strategies, much as they do external managers today.
More than half the LGPS funds already use independent advisers and we act in this role for three funds. Independent advisers can offer context, challenge, and expertise and would certainly help to mitigate these conflicts. But the pool of individuals with experience of providing this service to LGPS funds is limited and they may not have the resources to hold a complex organisation such as a pool fully to account, especially in the area of strategic advice.
If the requirement for funds to take 'proper advice' survives into the new regulations, we believe that will be sufficient and allow funds to choose whether they wish to take it from an independent adviser, an investment consultant, or their pool.
We believe it would be better for the source of this advice not to sit on the committee, as it will make it easier for the committee to deal with inadequate service from the adviser. Currently we take full part on all committee discussions where we act as independent adviser, but do not have a vote. In our view that is appropriate.
Pool governance
Question 27: Do you agree that pool company boards should include one or two shareholder representatives?
We do not agree with this statement. Good practice internationally is for boards to be completely independent of both shareholder representatives and executives. The reason is that it makes it easier for the board to hold the executive to account, and for shareholders, if they deem it necessary, to fire the board. The recent example of AIMCO in Canada is pertinent here – the provincial government fired the whole board and some senior executives to ‘reset the investment corporation’s focus’.
In our view it would be more beneficial to put a duty akin to stewardship on each pool’s shareholders, both singly and collectively, to oversee it in a constructive way, including engaging with it, setting it a clear mission and providing it with sufficient resources and budget.
Question 28: What are your views on the best way to ensure that members’ views and interests are taken into account by the pools?
The further distancing of members from investment is one of the negatives of these reforms. The duty of fiduciary duty will remain with the AAs, while the pools’ duty and loyalty is to their shareholders, and only indirectly to members’ interests. This may work in practice if all parties behave well, but it is not a sufficiently robust governance structure to ensure that members interests are protected at all times.
Another negative from these reforms is that members will inevitably find it more difficult to make their views known to the pools who invest on their behalf. This is not easy to mitigate, but there are examples of good practice to follow from large private sector pension schemes.
Question 29: Do you agree that pools should report consistently and with greater transparency including on performance and costs? What metrics do you think would be beneficial to include in this reporting?
29 a) Yes, we agree with this statement. For example, the claims of cost savings by pools and government over the last five years are simply not compatible with the data provided by the funds through the annual SF3 reports. Greater transparency in how the pool savings have been calculated as well as consistency in how the SF3 data is gathered would generate more trust in the Government’s assertions that there are efficiencies to be made from within the LGPS.
In reporting performance, good international practice would be for each pool to measure overall performance against a reference index, which could be either a basket of assets or a simple two asset portfolio of equities and bonds. This would be simpler for stakeholders to understand at a high level, and would indicate whether diversification into other assets (e.g. private assets) had in fact added value. Pools would of course be expected to report to AAs on the performance of individual strategies and sub-funds too.
29 b) At shareholder level we suggest the following metrics:
net performance vs a reference index
overall investment costs with a breakdown into costs incurred directly, costs incurred by third party managers, and performance-related costs
remuneration (including performance-related) of directors and senior staff
Chapter 5: Equality impacts
Question 30: Do you consider that there are any particular groups with protected characteristics who would either benefit or be disadvantaged by any of the proposals? If so please provide relevant data or evidence.
We have no comments here.
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