This has already raised frustration with the LGPS Funds and pools and ignoring these concerns would be detrimental to the Government’s ambitions to encourage change. We believe the proposed changes outlined in the Government’s consultation would create a number of risks and unintended consequences for the LGPS.
Scope and size of the proposed changes: The consultation recommendations for the changes to the scope and scale of the Pools would be a significant change and huge undertaking with a proposed timescale that is hazardously ambitious. The Pools are still developing their capabilities and are immature in asset /fiduciary manager terms. The proposed speed of change risk inefficient progress and poor outcomes – including irrecoverable build costs and investment losses resulting in increased cost to the taxpayer. We would instead like to see the Government prioritise their objectives and focus on competing the asset transition to pools and building local investment capabilities.
Strategic Asset Allocation advice : Around 90% of LGPS funds use professional investment consultancy services for their investment strategy reviews. These operate within an efficient and competitive market, with a well-established procurement framework, with large resources dedicated to the delivery of high-quality advice in a cost-effective manner. The innovation and strong returns of the LGPS over decades is testament to it. By forcing advice from a single provider (which funds cannot leave), who then fully implements that advice and reports on performance, you remove competitively driven value for money, high service levels and innovation, whilst introducing conflicts of interest. From a cost perspective, pools will not be able to leverage the economies of scale (and already significant sunk costs) which investment consultancies use to deliver advice services. To deliver improved consistency, advice can be limited to only the asset classes offered currently, or could reasonably be offered, by the pools. We believe this is a far better way of achieving the benefits of greater scale than removing the benefits of the current competitive market. By reducing the requirement for pools to build advisory functions, it would allow them to prioritise resource and to focus on the more impactful areas of the consultation proposals.
Consistency: We agree that there are areas where a more consistent approach would benefit outcomes, however, to use of consistency as a standalone target risks unintended consequences such as losing local accountability, creating scheme-wide systemic risk, and limiting innovation. The opportune time to pursue greater consistency is when the pooling arrangements have matured further and there is evidence of best practise that enhance outcomes.
Good Governance: After our involvement in the Good Governance review, we’re excited to see the inclusion of the outcomes of the Good Governance work in the consultation. These proposals have good support and are positive for standards in the LGPS. Again, the implementation timescales will need careful consideration. Some of the new requirements will take time to consider at the local level and then put in place – for example, the creation of the new senior LGPS officer role may require local structures to be amended and/or external recruitment to fill the role.
Requirement to appoint independent pension adviser to Pension committee: We recognise that the LGPS is a highly specialised area and appointing an independent pension adviser can improve Pension Committee decision making. However, this is not a substitute for independent regulated professional advice supported by appropriate research and modelling capability – which currently adds significant value and will be essential as the role of pools expands. There are currently an insufficient number of individuals who have the skills and understanding of the complex statutory and regulatory foundations of the LGPS to effectively support the 86 fund committees in the way envisaged. At best this means an uncompetitive and unhealthy market. However, there is a greater risk of poor outcomes and slowed delivery of government priorities.
Local Investment: We are supportive of the policy direction on local investment. However, we would encourage realistic timelines for the LGPS to increase local investments to allow for a flow of newly originated local project opportunities to be created. This will avoid forcing capital into a small set of opportunities, ‘bidding up’ prices and pushing down returns. The investment will be incredibly important in the potential for improving local areas, but if delivered poorly it could do harm.”
Hymans Robertson Response to Consultation
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