“As is stands, the consultation is heavily focused on reducing costs rather than driving genuine, long-term value. In aggregate the LGPS has delivered returns of c.7% p.a. over the last 10 years, comfortably ahead of (but clearly risk-aligned with) liability discount rates. This is clear evidence that Administering Authorities (AAs) are effective at setting strategic asset allocation, which – as the government rightly states – is the key factor in the difference in net returns between portfolios and it's critically important that this remains with the administering authorities who continue to have fiduciary responsibility for meeting benefit payments.
“So, while it might drive some short-term cost saving (which we would question), AAs receiving principal advice from their pool company could be counter intuitive over the long-term when thinking about realised net asset returns versus objectives.”
Davys explains: “Significant work is needed for pools to be able to offer high-standard advice tailored to each AA’s unique circumstances, and without clear oversight there is a risk of pool companies setting strategic asset allocations which major on cheap solutions or assets for which they already have pool solutions, thereby limiting innovation. The time frame set out for the pools to develop the full advice service offering required is also highly ambitious. This process should not be rushed, as there could be long-term ramifications for AAs if their investment strategies are incorrect.
“It is therefore crucial that any advice provided by the pool be subject to extensive challenge and oversight, to mitigate conflict-of-interest concerns mentioned above and support AAs in scrutinising whether the advice is in the best interest of the AA’s employers and members, to meet their fiduciary duty. In the private sector it’s common practice for pension funds to outsource investment arrangements to Outsourced Chief Investment Officers (OCIOs), who operate as fiduciaries in the same way as being proposed for pooling arrangements, but they make use of third party external independent providers to support with due diligence and oversight to ensure they are getting value for money.
As needs will vary between funds, it should be for administering authorities to determine whether - and who - to appoint to provide oversight and management of services being outsourced, be it independent advisers, consultants, ex-senior officers. Based on our conversations with local authorities, getting some level of external input outside of the pool with a broader knowledge base is going to be even important to support the administering authority in ensuring robust oversight of the pool and that all objectives are being met.”
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