By Tim Gilbert, Partner at LCP
1. Each of the 89 LGPS funds in England and Wales will move 100% of assets to the 5 LGPS “Pools” – this is not new and there is already a plan to do this, but the consultation states the Government will legislate to mandate this pooling if insufficient progress is made.
2. The Funds will fully delegate the implementation of investment strategies to the Pools. All pools will become FCA regulated investment managers, and the Funds will take advice on the investment strategy from the Pools.
3. Funds and Pools will work together with local authorities to agree how assets will be invested in “local investment, for the long-term benefit of local areas”. Pools will develop capabilities to assess and implement these local investments.
There are further proposals on governance. These include appointing a named officer responsible for the management of the Fund, training requirements for those involved in the management of the LGPS, improved – and consistent – reporting, and regular governance reviews.
In my view, a more efficient scheme and better investment returns are good ambitions, and I cautiously welcome the proposals to enhance the current pooling arrangements. But it is not clear from the consultation documents who will benefit if these are achieved. The equality impact explicitly states: “there will be no change to member contributions or benefits as a result” (unlike some of the pre-speech material which discussed “better member outcomes”).
I hope the outcome will be lower employer contributions, which would have the more direct benefit of freeing up cash for employers in the short term. Greater pooling without any reduction in contributions would mean employers paying more into the scheme than needed to meet benefits. Even if this leads to investment in the local economy it is likely to be less efficient than simply giving cash back to councils and other employers.
So my main ask is that employers have to benefit from lower costs; however I would like to see the LGPS consultation go further in a number of areas:
Ending the postcode lottery
LCP have long been supporting our clients calling for greater consistency across the LGPS, and a step away from the “postcode lottery” for employers which affect the ongoing contribution levels and charges when employers exit a Fund. The approach to exits varies much more than just the impact of the relevant factors such as the demographic make-up and investment strategy of the Funds. The proposed governance changes should help to deliver greater consistency, but more is required to ensure a consistent approach to funding.
It is important to remember, this whilst a “one-size fits all” approach has merit for the typical Local Authority employer who would benefit from economies of scale, the needs of the many other participating employers, such as academies, charities and other not-for-profit organisations, should be considered too.
Getting the governance of the pooled structure right
As we have seen in the wider defined benefit universe, combining asset allocation advice and investment management does not automatically lead to better outcomes – for example, where defined benefit schemes use fiduciary management arrangements strong oversight is required to avoid conflicts of interest. We have seen issues where trustees of defined benefit schemes are unable to objectively assess the performance and value-for-money provided by the manager.
Further, it can be complex to escalate issues or even change manager where the performance and value-for-money is not delivered. Appropriate structures will need to be established to monitor the implementation, ensure the desired efficiencies are achieved and hold the Pools to account when needed.
Maintaining a true local link
The proposals to develop expertise within the Pools to oversee and manage local investment are positive. Funds have shown the impact and positive return local investments can deliver, and developing specialist expertise will help with more efficient delivery. Many participating employers such as charities and housing associations could also benefit from the available funds.
There is a risk this structure means that only larger direct investments are deemed to be viable. Greater pooling of assets should not mean a total shift away from smaller community-based projects and should retain a focus on local social outcomes.
Sustainability needs to be at the heart of growth
It is disappointing there is limited focus on sustainability alongside pooling. Environmental and social sustainability needs to be embedded in any strategy for the growth to be economically sustainable. Expanded Pools with greater autonomy over investment decisions should have sustainability and ESG at the heart of their remit.
Overall, the proposals are positive but as always, the devil is in the detail. The LGPS is huge with more than £400bn of assets across England and Wales. Despite this, it should not be treated as a single mammoth scheme. There are more than 20,000 participating employers across the country, and between them they will want to adopt a range of strategies. If the benefits of greater pooling come at the price of employers diverting resources away from delivering vital local services and putting more money into the Funds than is needed the net impact will be negative.
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