Over a quarter (30%) of Local Government Pensions Scheme (LGPS) pension Funds have come together to urge the Government to re-think their plans to overhaul the LGPS, as laid out in its ‘LGPS: Fit for the future’ consultation. These include rethinking plans to switch responsibility for determining how LGPS Funds invest their assets from individual Funds to Pools, alongside mandating that funds “take their principal advice on their investment strategy from the Pool”. In a paper highlighting concerns, 30 co-signatories, comprising LGPS Funds and advisers, including Hymans Robertson claim the Government’s plans would put the LGPS’s £400bn assets at risk, by introducing a raft of unintended consequences. The Signatories call on the Government to revisit these plans, as they raise the potential for poor investment returns – directly impacting local taxpayers.
The paper entitled, The future of investment strategy advice in the LGPS, considers the investment strategy proposals in the consultation in detail. It examines the risks within the Government’s new proposals and offers an alternative solution that better delivers for Funds, Pools and the Government. This alternative would enhance capacity to develop local investment capabilities –an area which could have the greatest impact on growing the UK economy. The alternative model also sees Funds retain the option to procure their own investment strategy advice (including from the Pools), thereby using competition to maintain value for money, high service levels, innovation, and diversification.
Commenting on the need for a more nuanced approach to changes to investment in the LGPS, Iain Campbell, Head of LGPS Investment, Hymans Robertson says: “While the Government’s ambitions are understood, there are other ways to achieve the same, if not better, results without introducing the level of risk to both the LGPS and UK. As the Government acknowledges, investment strategy is by far the most financially impactful investment decision a pension committee makes. The advice in setting an investment strategy is incredibly impactful, and important in aligning decisions to Funds’ goals and needs.
“Nearly all of Funds use investment consultancy services for their investment strategy reviews. These operate in an efficient and competitive market, with significant resources. The LGPS performance to date is strong testament to the value added. Therefore, Funds should retain the option of using this tried and tested route – and select their advisor. This will minimise risk. Pools can then be included as an option once they have developed the services. To force advice from a single provider, that is then responsible for implementation and performance, introduces conflicts of interest. It also removes competitively driven value for money, high service levels and innovation. Of significant concern is the inability of Funds to change provider if their Pool is not providing an adequate service. If Funds lose access to independent advice, there is an increased risk of creating a democratic deficit and weakening the connection to local accountability. These concerns are why of the 80 LGPS Funds we polled, 95% said they would prefer to retain the autonomy to choose their own advisers.”
Commenting on the alternative solutions put forward by the paper, Iain adds: “Alongside contributing Funds, which represent over 40% of counties, we have carefully designed an alternative to address these risks while ensuring that the LGPS is well-positioned to deliver the Government’s overarching goals, and under considerably shorter timescales. This includes facilitation of more efficiency and strategic consistency between Funds which meets the Pools interests, without the need for sinking irrecoverable costs into building their own advisory service in unachievable timescales. In turn, this creates space to allow Pools’ objectives and focus to shift to building local investment capabilities. This is perhaps the most difficult of services for the Pools to build but has the largest potential for impact on the UK economy and therefore carries the most focus.”
Commenting on how this will help the Government achieve its priority ambitions, Iain adds: “Adjusting the scope and scale of the Pools is a huge undertaking and timescales are hazardously ambitious. The Pools are still developing their capabilities and are immature in asset or fiduciary manager terms, yet their role is being expanded significantly in a very short timeframe. Prioritisation is required to ensure these are well considered and robust and to ensure they have the capacity to continue to manage their Funds’ assets.”
“Pools should be focussed on catalysing local investment capabilities, which although is likely one of the most challenging services for the Pools to provide, is one of high importance to the UK economy. Pools could play a key role in supporting the LGPS with the capacity to consider these complex investments. Meanwhile, an established, functioning, and competitive market exists for investment strategy advice, that can continue whilst other capabilities are developed. This arrangement should be kept under review as Pools develop, for example every three years under the lens of improving efficiency, good governance and better outcomes.”
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