Pools are progressing well, but will come under pressure this year, argues Chris Bilsland.
It’s been over 10 years since the Independent Public Service Pensions Commission recommended an increase in member contribution rates. However, as all of us close to the scheme pointed out at the time, the implications for the LGPS – and the wider economy – if our relatively low paid workers were priced out of the scheme were simply unacceptable. Since then, the scheme has been modernised and reformed but the pressure on funds and pools to maintain investment returns to keep the scheme affordable remains as important now as ever.
2019 provides another health check on the scheme with the triennial valuation being at the forefront of most people’s minds. However, despite the recent fluctuations in equity markets, most funds will be looking forward with some confidence towards improvements in funding levels, continuing the trend we have seen for every valuation since 2010, and continuing to confound those who have – in my opinion anyway – unfairly and inaccurately criticised local authorities for their management and stewardship of the LGPS. In these very uncertain times, the LGPS continues to be held in safe hands.
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However, it’s unlikely that funds will be complacent. Most, if not all, will be reviewing and maybe revising their strategic asset allocation and will be looking closely at whether it fits their own projected funding position – and these results are bound to vary from fund to fund. This in turn puts a particular pressure on pooling as it will not be possible for the pools to be fully sighted on all the prospective changes in asset allocations until all the funds have completed this essential work. This is bound to be frustrating for those funds who are able to take an earlier position and will not want to wait too long before implementation. Pools will need to keep very close to their client funds throughout this time, be proactive and take extra care to manage and deliver expectations.
Pools will also come under a new and different level of scrutiny in 2019 as, for the first time, it should be possible to begin to compare how each is performing, both in terms of delivering the government’s agenda as well as meeting their client funds’ more specific requirements. The results are likely to be variable and, if some pools are making better progress, uncomfortable questions are bound to be asked of the others.
One of the great strengths of the LGPS has been the way in which funds have benefited from sharing information and best practice, and pooling is essentially another exemplar of collaboration. However, pools can learn from each other and, in 2019, we should expect to see more in the way of information exchange and possibly joint working.
When it comes to the inevitable comparison of the pools, I’m expecting that all will be able to have delivered some impressive savings on management costs, particularly on fees. All should also have strong governance and decision making processes in place, although there are bound to be some teething problems. However, achieving value for money is much more than cost reduction and the delivery of other benefits of scale, such as the enhanced investment returns through the rationalisation of managers with improved oversight, and an improved capacity to invest in alternative assets such as infrastructure. This is likely to be very much a work in progress. The LGPS is a long-term business and some of these benefits cannot be delivered quickly.
Nevertheless, the outcome of the 2019 valuation and the analysis of where the investment returns have and will come from could well mean that making progress on investment in alternative assets will become more vital in 2019. The London boroughs’ early adoption of pooling was driven largely by the recognition that direct investment or co-investment in alternative assets such as infrastructure or property would only be effective through aggregation of individual borough funds’ allocations. But there’s some impressive research, which I think will be affirmed as funds look at their 2019 valuation returns, that delivering the superior investment returns that LGPS funds need to meet the pension promise without increasing contributions is becoming more and more difficult. Whilst stocks in aggregate outperform bonds, it looks as though most stocks do not, and positive returns are concentrated in very few stocks. Hence the need to look at alternatives to equities, such as infrastructure and property, to deliver the level of returns needed to keep the scheme affordable.
2019 then should see continued progress. But it might also demonstrate the need to continue to evolve the investment approach and for pools and funds to work very closely to ensure all needs are met.
Chris Bilsland is non-executive director London Pension CIV Ltd
