The belated establishment of LGPS pools has revealed an inequality in resources across differently sized schemes, says Broadridge's Jonathan Libre.
Traditionally, the use of third-party asset managers by local authority schemes has been strongly influenced by size. Prior to the pooling process, larger schemes were more likely to have internal investment capabilities while smaller schemes were more inclined to outsource all investments to third parties.
This has impacted the subsequent behaviour of the pools. Pools comprised of schemes with large memberships have leveraged existing internal investment capabilities. The primary example is the Northern Pool, whose average scheme size is significantly larger than that of any other pool at £15bn. The underlying schemes for this pool have the lowest investment outsourcing rate, at approximately 55 per cent of their assets.
Prior to mandatory pooling, pools that comprised many small schemes were likely to hold multiple relationships with a variety of third-party asset managers
By contrast, the pools that predominantly comprise smaller schemes, such as the London CIV, the Brunel Pensions Partnership, the Access pool and the Welsh Pensions Partnership, have outsourced almost all of their assets to external asset managers.
Outsourcing rates also differ significantly by asset class. In general, active equity is the asset class most likely to be allocated to in-house teams. This is based on the belief that the pools may generate significant cost savings by doing so. Inexpensive passive strategies, as well as specialist asset classes such as diversified growth funds that often rely heavily on manager skill, are more likely to be outsourced.
The way member schemes gain access to third-party managers also differs across the pools. Some pools, such as the Local Pensions Partnership, have established multi-manager sub-funds that blend allocations to both in-house and third-party managers. Other pools bear a closer resemblance to traditional investment platforms, where schemes can allocate across several white-labelled third-party managed strategies.
Prior to mandatory pooling, pools that comprised many small schemes were likely to hold multiple relationships with a variety of third-party asset managers. The London CIV, for example, has more than 30 constituent local authorities, who would have historically independently selected their own managers for each asset class.
These pools are now experiencing significant upheaval through the rationalisation of manager rosters. For asset managers, this shakeup has unleashed substantial price competition and fee compression, although it has also created an opportunity for new entrants to the market.
As the pools become more established they will continue to converge as they look to meet the original objectives of the pooling process.
However, the characteristics of the underlying member schemes will continue to influence the nature of each pool, meaning the pools will be less homogenous than originally expected.
Jonathan Libre is principal in the Emea Insights team at Broadridge
