Amidst the angst that surrounds private sector workplace pensions , there is an oasis of calm – LGPS.
LGPS swerved LDI, got the turbo-charge from surging interest rates and is now looking in embarrassingly good health. Unlike other public sector pensions which are subject to the Government Actuary’s Scape discount rate, LGPS schemes have a degree of self-determination – they can do what they like – and do!
That’s because their benefits aren’t supported the tax-payer on a pay as you go basis but by funds invested at the discretion of the 90+ LGPS funds (administrative authorities) Over the past few years, a move has been made to rationalise this laboranthine structure so that funds can access investments through “pools” where investments are chosen and deals negotiated.
But all is not sweetness and light between the funds and the pools. Many funds want to do their own deals , choose their own investments and resent interference from the pools that they see as necessary intermediaries. This is not the way the pools see things. They consider themselves the investment blue bloods and so clearly does the Government.
One of the many Mansion House consultations is one that looks specifically at this issue. I am speaking at an LGPS event next week so I thought I’d bone up on the issues and answer the questions the Government has for us. After all, we do require diversity and inclusion in thinking.
This consultation seeks views on proposals in 5 areas:
- First, the government sets out proposals to accelerate and expand pooling, with administering authorities confirming how they are investing their funds and why. While pooling has delivered substantial benefits so far, we believe that the pace of transition should accelerate to deliver further benefits which include improved net returns, more effective governance, increased savings and access to more asset classes. We propose a deadline for asset transition by March 2025, noting we will consider action if progress is not seen, including making use of existing powers to direct funds. Going forward, we want to see a transition towards fewer pools to maximise benefits of scale.
- Second, the government proposes to require funds to have a plan to invest up to 5% of assets to support levelling up in the UK, as announced in the Levelling Up White Paper (LUWP). This consultation sets out in more detail how the Government proposes to implement this requirement and seeks views on its plans.
- Third, the government is proposing an ambition to increase investment into high growth companies via unlisted equity, including venture capital and growth equity. The government believes there are real opportunities in this area for institutional investors with a long-term outlook, such as the LGPS.
- Fourth, the government is seeking views about proposed amendments to the LGPS’s regulations to implement requirements on pension funds that use investment consultants. These amendments are needed to implement the requirements of an order made by the Competition and Markets Authority (CMA) in respect of the LGPS.
- Finally, the government is proposing to make a technical change to the definition of investments within LGPS regulations.
I suspect that not many people will comment who aren’t involved in managing LGPS but in my capacity as tax-payer and pension enthusiast – here are the thoughts of AgeWage (in italics).
Question 1: Do you consider that there are alternative approaches, opportunities or barriers within LGPS administering authorities’ or investment pools’ structures that should be considered to support the delivery of excellent value for money and outstanding net performance?
LGPS aims to balance the needs of local communities with the economies that can be achieved through pooling. There appears to be advantages in localised investment (especially in levelling ujp) but the plethora of London funds don’t make sense to me. London funds could be with a great deal of consolidation.
Question 2: Do you agree with the proposal to set a deadline in guidance requiring administering authorities to transition listed assets to their LGPS pool by March 2025?
Yes, it would be good if Government could set itself deadline and censure itself for missing them (pension dashboard for instance).
Question 3: Should government revise guidance so as to set out fully how funds and pools should interact, and promote a model of pooling which includes the characteristics described above?
The pools have been around long enough to be in steady state by now. that the optimal use of the pools is still to be achieved suggests that more than guidance is needed. Funds should be answerable for any decisions taken when not using the pools.
Question 4: Should guidance include a requirement for administering authorities to have a training policy for pensions committee members and to report against the policy?
Question 5: Do you agree with the proposals regarding reporting? Should there be an additional requirement for funds to report net returns for each asset class against a consistent benchmark, and if so how should this requirement operate? We think this reporting is essential.
A benchmark can be established through industry consensus and net performance will give important insights into the effectiveness of both the funds and their governance
Question 6: Do you agree with the proposals for the Scheme Annual Report?
Question 7: Do you agree with the proposed definition of levelling up investments?
Question 8: Do you agree that funds should be able to invest through their own pool in another pool’s investment vehicle?
Yes, ultimately we will only need one pool, it will become one of Britain’s great wealth funds.
Question 9: Do you agree with the proposed requirements for the levelling up plan to be published by funds?
Yes, the funds are doing a great job of this but more can be done
Question 10: Do you agree with the proposed reporting requirements on levelling up investments?
Question 11: Do you agree that funds should have an ambition to invest 10% of their funds into private equity as part of a diversified but ambitious investment portfolio? Are there barriers to investment in growth equity and venture capital for the LGPS which could be removed?
There are no barriers, many funds have gone way beyond the targets already and want to go further
Question 12: Do you agree that LGPS should be supported to collaborate with the British Business Bank and to capitalise on the Bank’s expertise?
We certainly do
Question 13: Do you agree with the proposed implementation of the Order through amendments to the 2016 Regulations and guidance?
We cannot comment
Question 14: Do you have any comments on the proposed amendment to the definition of investments?
Question 15: 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 view on this