Rachel Elwell writes how new research reveals there is no single template for pension pooling.
Now in the seventh year since the idea of pooling was first mooted, it is perhaps apt to pause for a moment and consider a few fundamental questions: Is it actually working? And what does the future hold?
The first point to highlight is the remarkable progress the LGPS has made on pooling since 2014. Eight pools have been established; investment funds covering everything from equities and fixed income and infrastructure have been designed and launched; offices have been opened and staff recruited; and more than half of the LGPS’s £276bn of assets are now pooled.
And much of this taking place during a global pandemic. Local government’s ability to effectively deliver change should never be underestimated.
Pooling has had an almost immediate impact on the LGPS. The Government announced earlier this year that around £900m of cost savings are expected by 2023, based on assets transitioned to date. If Border to Coast’s experience that more assets are due to be pooled in the coming years is replicated across all the pools, these savings will increase significantly.
Add to this the value from the expansion of investment capabilities—by, for example, creating a programme of infrastructure investment totalling more than £1bn a year as we have done here at Border to Coast—we can see that pooling is already making a positive difference for the LGPS.
Development
While this progress is to be welcomed, pooling remains in its relative infancy. We believe it has the potential to add significant value above and beyond cost savings.
It is for this reason that we at Border to Coast came together with six other pools—ACCESS, Brunel, LGPS Central, London CIV, LPP and Wales—to commission independent research looking at how pooling has developed in more mature markets across the world.
The project examined eleven public pension pools in six regions to understand the issues they faced in their evolution, and the solutions they developed to overcome them. Our aim was to understand how we might learn from others’ experience, particularly from international pools that have been active for 10, 20, or even 30 years.
Ultimately, it confirmed what the LGPS has already experienced: Pooling provides scale which can drive significant benefits.
These benefits are not confined to driving down investment costs (through an enhanced ability to negotiate with external managers and investing in people and systems to manage select investments).
The research confirms that a key benefit is improved control over investments, with greater choice and access to higher quality assets and specialised investment professionals.
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Good and bad news
So, what does this research mean for the UK? Is there a template that the LGPS can replicate and guarantee our success in the years to come? The good, and bad, news, is no.
Each international pool studied had a different business model and strategic purpose influenced by issues such as their different starting points, differently shaped liability or risk profiles, and local regulation. Quite simply, there is no single “correct” model for pooling for us to replicate.
LGPS pools and their partner funds can therefore continue to evolve in the manner that best reflects their history, their current position, and the ongoing priorities of partner funds. Although, of course, designing and implementing bespoke solutions won’t always be easy or smooth.
That said, the research did identify some common factors that may assist us as we consider how to continue to add value.
When quizzed about the factors that most affected a pool’s ability to deliver for their owners – for the better if managed well, or for the worse if managed poorly – four themes emerged:
- Effective governance. The development of clear responsibilities, with simplified, flexible decision-making and accountability for outcomes.
- Professional management. Pooling offers the opportunity to bring professional teams together in a sustainable way, where training, development and succession planning can be developed and, most importantly, trusted relationships can be built between pool and partner funds.
- Aligned strategic asset allocation and implementation. With effective governance, the right people, and trust between stakeholders, the alignment of long-term asset allocation and implementation is a key driver of investment performance.
- Government and regulatory environment. While outside the direct control of the participants, the research also highlighted that the nature and strength of central government expectations, and the regulatory environment used to effect them, can impact the pace at which pooling delivers value.
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Partnership
What this insight means to each individual pool will vary. But, to quote one of our own Border to Coast partner funds officers: “I believe that the key to asset pooling working is to have a true partnership with our asset pool operator, rather than the traditional investment manager/client approach.”
At Border to Coast, fostering a true partnership is the approach we and our partner funds have collectively chosen to take. Border to Coast exists for, and because of, our eleven partner funds.
As CEO, I believe that the chances of success are maximised when we maintain close contact, build trust, and collectively discuss the most effective way to achieve our partner funds’ long-term objectives. Insights such as the international pooling research help us to do just that.
In the years since the murmurs of pooling began, the LGPS has made huge strides in implementing it here in the UK. I have every confidence that in working together, we will continue this positive progress.
Rachel Elwell is chief executive of Border to Coast Pensions Partnership
The full report, LGPS in the UK: Learnings from International Peers, can be found here.
