Talking head: The London Pensions Fund Authority's director of pensions Mike Allen discusses the "need for positive change" in local government pension funds, and how the LPFA's approach to growth and matching assets has changed.
This is a vitally important time. The need for positive change within public sector pensions in the UK is already widely acknowledged.
Only last month, the Financial Times published the latest view of independent consultant John Ralfe that the LGPS’s cash funding deficit was close to £100bn in 2013, rather than the £47bn announced in the 2013 triennial valuation.
Skilled and trained governance has been shown to have a positive impact on fund performance
We welcome the governance consultation’s recognition of the importance of knowledge and skills of board members as an important aspect of scheme governance.
LPFA already operates in line with the Chartered Institute of Public Finance and Accountancy's knowledge and skills framework, voluntarily carries out board training and appraisals and is embarking on another board performance evaluation this summer.
We firmly believe effective governance can create a dividend in fund performance and is an essential tool in tackling the LGPS deficit.
Our board has helped create our investment strategy. A liability-driven approach has already been the catalyst for change within our portfolio, prompting a move to invest more of our fund in illiquids, such as housing, private equity and infrastructure, whose return profiles better match our liabilities.
A further element being introduced to our investment strategy is a concentrated buy-and-hold approach to equities, which delivers savings through reduced transaction fees and in-house management.
Skilled and trained governance has been shown to have a positive impact on fund performance. Without the benefit of our board, many of whom are experts in illiquids, we would not have been able to make these changes to our strategy, which are helping to manage down our deficit.
Our submissions to both consultations will include our model for voluntary partnering between funds. This will help more LGPS funds access economies of scale, in-house expertise and access to direct investment in asset classes that better meet long-term liabilities.
The model will also retain strong local accountability under the robust governance arrangements, which are proven to deliver fund performance.
This can happen within existing legislation and we are working with like-minded funds to make this happen. You can see more about this asset and liability management partnership model on our website.
Mike Allen is director of pensions at the London Pensions Fund Authority
