Draft guidance from government on the pooling of LGPS assets is welcome, but might not stop all tension between member funds, says Peter Smith.
January’s latest consultation on guidance for pooling assets reads a little like my old school reports:
“…..is doing well….could do better……with greater focus should be able to achieve long-term aims”.
After 36 years, I am still waiting on my international call-up.
Let’s hope pooling achieves the government’s aims more quickly.
The new guidance brings welcome clarity and consistency to the terminology used in relation to pooling.
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It also more clearly, and more forcibly, sets out the government’s expectations in relation to it.
The extent to which this last point is welcome will be seen over time.
The nature of the eight pools and their pooling members are very disparate.
They vary from collaborations between relatively small numbers of like-minded members to those created through geographic proximity.
“There is still a long way to go to complete the transition of assets and deliver the full benefits of scale”, states the guidance.
Effective guidance that creates greater engagement and, with it, participation.
This needs a regulatory environment which achieves the dual aims of developing a robust governance framework (which pooling members feel they can influence) whilst being sympathetic to the long-term aims of both the pools and their members of delivering strong, consistent, risk-adjusted returns in an efficient manner.
Time will tell whether it is successful.
Pension committees are in many ways required to act in the same way as trustees in their duty of care to scheme members and employers.
I deliberately swapped the order of these from those in the guidance.
In my view, both trustees and committees quite rightly put their members as the focus and at the forefront of their thinking.
This means taking a long-term strategic view in relation to the investment of their assets.
It is pleasing to see the guidance acknowledge this.
There is an expectation that listed assets will be moved to the pools in the short term.
However, the potentially more expensive transitioning in less liquid assets should balance timing, cost effectiveness and availability of suitable assets within the pools.
These principles seem sensible.
As with all regulation, the devil will undoubtedly be in the detail.
One such detail, that may be incendiary, is the potential sharing of transition costs that could see pooling members with a continuing fund cross-subsidise those that are new to invest in it when they move into the pool.
Will this see engaged and successful councils, with well-performing investment managers that are used by the pool, cross-subsidise their less engaged or lower-governance pooling partners?
Within the guidance there are many references to the need for ongoing review.
It is to be hoped this will encourage behaviours that bring pooling partners closer together.
Pools will not be able to deliver all things to all schemes.
The wish of pooling members to achieve the diversification and investment opportunity they desire, with that of the pools to achieve scale and drive down cost, requires the delivery of value to be successful.
Whether their relative measures of value are aligned, and compromise can be achieved, will emerge over time.
The guidance makes it clear that this is the government’s aim both in the short and longer term.
Peter Smith is an investment consultant at pension adviser Barnett Waddingham
