Where are local authority pension schemes at in pooling their assets, and what do they still need from the government? Hymans Robertson's David Walker takes a closer look.

Key points

• Six out of eight pools meet the target scale criteria.

• The focus of governance structures ranges from allowing internal teams to operate more widely to implementing specific strategies and structures.

• Investment rationale and opportunities that meet funds’ requirements are need to boost infrastructure allocation.

The criteria included:

  • the need to collaborate, establish, and invest through asset pools;

  • each pool should have assets of at least £25bn;

  • evidence of improved governance and management of assets by the pool at local level, and effective decision-making and implementation at pool level;

  • delivery of substantial savings in investment fees, in the short and long term, while maintaining overall investment performance;

  • demonstrating infrastructure investment, and how pooling can improve the capacity and capability to invest in this asset class.

Not all pools meet the target scale

There are currently eight pools, six of which meet the required scale criteria of assets worth £25bn so far. The pools that do not meet this criteria have presented cases to be allowed to continue as standalone pools, either for clear political reasons or with strong evidence of being able to meet other criteria. 

It is not yet clear what the government’s view is on this or what steps it might take, particularly given the knock-on impact any decisions might have on other pools.

Unresolved governance questions

A range of proposed governance structures are being considered by the formative pools. A common thread is the adoption of some form of Financial Conduct Authority-regulated entity within the pooling structure to help manage assets on a collective basis and make FCA-regulated investment decisions.

Any further delays to an official 'green light' from government on the proposed structures will make April 2018 an increasingly hard target

However, there are significant differences in some proposed models. For pools with considerable existing internal management, pooling has been an opportunity to formalise and put in place new structures that will allow the internal teams to operate more widely. 

For others, the role may be more focused on helping implement specific strategies and structures designed by participating funds. 

Unresolved issues still exist as to how local decision-making of administering authorities is communicated and translated into investment offerings. New processes, decision-making structures and powers of delegation are still being ironed out by most. 

Timescales are challenging. With an April 2018 target deadline, pools are waiting for the government to communicate whether the proposed structures meet with approval. Any further delays to an official 'green light' from government will make April 2018 an increasingly hard target.

Evidence of cost savings

There is already strong evidence of savings being achieved by funds. Managers have been proactive in looking to offer collective fee rates with a view to securing roles under the new structures. 

However, some potential cost savings will depend on levels of consolidation implemented across the LGPS. This may require some compromise to get a solution that meets the wider requirements of the pool while satisfying locally determined investment needs. 

For some asset classes there have been quick wins but for others, particularly in the illiquid space, a cost-effective solution may take longer to develop.

Infrastructure requires opportunities

The July submissions from the pools were, in the majority of cases, positive in terms of the potential to invest more LGPS assets in infrastructure – although the potential size of allocations varied.

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There was also consistency in the responses, such that investment in infrastructure requires a clear rationale and the existence of opportunities that meet the risk and return requirements of the funds on a cost-effective basis.

Potential platforms are being considered. This has been a key area for cross-pool collaboration groups. A clear solution will take time to develop and one solution may not work for every pool.

While significant progress has been made by funds pooling initiatives over the past 12 months, the April 2018 target is challenging, and the need for guidance from the government on the acceptability of the current pooling proposals is critical.

David Walker is head of LGPS investments at consultancy Hymans Robertson

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