LGPS – a model investor for the private sector?

It’s obvious

Those familiar with the “au-pairs” will get the reference, in the  eighties it was obvious that men and women got different treatment , though they were equal in the eyes of God (or so I thought). I think it fair to say that the gender gap then as now was institutional.

Another gap that seems to be treated as “obvious” is that between the pensions of those working in the public and private sectors. Most  public sector pensions are genuinely different in terms of the covenant, there is no  fund to go wrong or stay right, there is simply a demand based on something weird called “scape” on employers and workers to pay a percentage of earnings in return for a tax-payer backed inflation protected pension. If this sounds familiar, then it’s because you were either a public sector worker , are a public sector work or were in the State Earnings Related Pension or S2P.

But a decent chunk of pensions are not paid by the taxpayer but by funds built up within the Local Government Pension Scheme , managed and administered by local boards but overseen by investment pools that are supposed to be providing economies of scale and investment expertise that couldn’t be achieved by the 85 local funds. The “LGPS” stands between the febrile world of private sector funded pension schemes and the rarefied air breathed by the unfunded schemes (teachers, civil service, police and NHS).

Long treated as ripe for plunder by the asset management industry, the LGPS has transformed itself into well run purchasers of financial services, largely through switching to pooling but also because of the knock on impact of good governance at the level of the local funds.When I visited the PLSA’s LGPS conference, I was struck by the pride of those running funds in their activities and a healthy tension between the funds and the pools, the former arguing that they knew best on local matters such as levelling up and the interests of their participating employers and members.

The Government is not so sure that local Funds should be procuring their own financial services. While focusing mainly on the private sector,  the chancellor also set out a target that all LGPS assets should be pooled by March 2025, a measure which goes beyond his initial spring budget announcement, which focused on the pooling of listed assets. The new target could pose a challenge for some LGPS funds which have opted to procure illiquid assets independently of their pools.

In a policy consultation document released on July 11th, the government highlighted that so far, the pace of pooling has been uneven. It estimates that just under 40% of all assets have now been pooled, with LGPS Central having pooled only 30% of its assets and LPP as much as 80%.

The government sees the pooling of all assets, including unlisted assets as the key driver to achieving economies of scale. It predicts that once all assets have been pooled, 5 of the 8 pools would meet its criteria for having assets in excess of £50bn. Beyond that, the government consultation also advocates the potential merger of some existing pools.

Different but Equal

Work done by Chris Sier and his Clear Glass organisation has identified the LPGS pools as centres of excellence in the management of illiquid assets, Sier singled out Border to Coast as having particular skill in the management of both listed and private assets.

The Government recognises the particular expertise of the pools and the capacity of LGPS funds to take risks in a way that equivalent private sector schemes no longer can. Having swerved LDI and benefited from the healthier liability valuations brought on by increased interest rates, LGPS are now the poster-child for the Government plans to “re-risk” our pension system

Jeremy Hunt has  set out an ambition to double LGPS investments in private equity to 10%, claiming that this shift in asset allocation would “unlock” £25bn of investment by 2025.

But neither Hunt, nor the policy consultation document imposed any hard targets on LGPS allocations, acknowledging that every fund was different and that private equity should be part of a broadly diversified portfolio. So it’s likely that the pools will retain discretion as to how to invest and remain at an arms length from the Treasury.

There remain deep suspicions within the pension community about the merits of investing more in the private markets, these are based on global perspectives. Yesterday the Australian regulator APRA expressed concerns that many returns claimed by Super funds were based on  “sub-par” valuations of private market assets. Australia is not alone

There will undoubtedly be mistakes made in purchasing asset management in the private sector and in the valuations of assets purchased. But we must trust the expertise we have and – despite its former reputation – the current status of the LGPS pools make them potential champions of best practice in the governance of illiquid investments. Similarly, in the procurement of local investments through micro-finance, the LGPS Funds can be stand-out in developing socially responsible investment.

Vive la differance!

Though operating in a different environment to private sector DB and DC plans, LGPS is best placed to show the private sector how to do things. Not only do I support the Government’s plans to increase the power and decrease the number of pools, but I like the nudge to greater allocations to private markets and private equity in particular.

I would go further. It is time that we started bringing some of the superstar investors who work within the pools into the debate on best practice in procuring and monitoring private market investments.


About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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