The Local Pensions Partnership has been on a journey to pooling reform. Trevor Castledine says it’s an enormous job but worth it to create more stable schemes with improved funding.
LGPS reform is clearly one of the largest changes the sector has ever faced and the challenges are great. Nearly as great as me finding time to write an article about the challenges of pooling.
Whilst everyone has approached the challenges differently, I can only speak about the Local Pensions Partnership (LPP). We began to identify the benefits of pooling before government announced sector-wide reform, and based our approach on being a not-for-profit pension services organisation that offers a full suite of pension services.
More than simply asset pooling, our initiative was to bring all pension services together: investment, liability and risk management, and pension administration. Each of these is a separate service under the same umbrella organisation — and looking to the future we recognised that there may be partners who did not want to use all of the various services we can offer, so we have set ourselves up to facilitate that. To successfully deliver the investment portion of our service offering and provide comfort to our pension fund partners, we decided that FCA (Financial Conduct Authority) regulation was the best way forward.
Working with the FCA was a new experience, but having to go through their approval process forced LCPF and LPFA (the Lancashire County Pension Fund and the London Pension Fund Authority) to think about how things were going to work, probably earlier than we would have done, which was helpful in itself.
The need to produce this joined up thinking in order to work with a third party — not least a regulator — helped to cement the relationship between partners. Early on we got to the bottom of what we agreed on, where we needed to compromise and the basic practicalities of putting this plan into action.
Dilution
It’s important to note that in my opinion, no compromise we made led to any significant dilution of the benefits of pooling: in fact, sensible compromises increased expected benefits with little, or no, real downside to our partners.
As with any major project, there is a sensitive balance between giving voice to diverse opinions and having “too many cooks”. To ensure the proverbial broth isn’t spoiled, it is vital that 151 officers and council officials are aligned across all parts of the collaboration as well as within their own councils.
Realising a pooling initiative is an enormous job, and even local authorities with good in-house investment teams won’t be used to managing this type of project. For some this may mean bringing in people who have some specialist skills to deliver results or rapidly increasing team size.
While this can be daunting with respect to up-front costs, it really represents a long-term economy. For example, if benefits of delivering pooling for a group of investments are £12m per annum, then a one month delay means permanently losing £1m. If this cost were hitting council deficits today, it would likely be intolerable.
It is essential to get a full team in place quickly with project management, in-house legal and in-house operation functions. Being completely resourced is a key factor in an FCA regulated world.
Whereas in the past, LGPS investment teams have been able to multi-task somewhat, the FCA requires separation of responsibility for investment decision making, implementation, performance reporting, compliance and risk management. In our case this has led to the formation of an investment operation division, as well as upskilling our risk management function: all positive moves.
Permissions
So, with the requisite skills and workforce in place, time to decide on the assets: “to pool, or not to pool?”
Not every existing asset will lend itself to being pooled and not every asset type is suitable for pooling in the same way. It’s likely that several different investment pooling ‘wrappers’ will be needed and this may mean obtaining different permissions from the FCA.
Then we go deeper; each pooling vehicle needs its own administrator, depositary, custody accounts and bank account, each with their own set of costs and time taken for onboarding. Our experience has been that it will take at least three months per vehicle to complete the pooling exercise, frequently because resourcing pinch-points will inevitably mean that the whole thing can’t be done in parallel.
In addition, every single line item needs to be reviewed in some detail to determine the correct strategy. Whilst developed-market listed equities are easy to value and cheap to transfer, virtually everything else has the capacity to be a much lengthier and more costly endeavour.
For example, new custody accounts in emerging markets can take months to set up while transaction taxes, including the potential for UK stamp duty leakage, could dent benefits for many years.
This means that it could be the case that some assets are left out of pooling altogether. The question then becomes which ones? And under what criteria? Furthermore, are funds comfortable to risk incurring a “please explain” from the secretary of state as a result?
All of this is before we get to the, ahem … complex details of KYC (know your customer) and AML (anti money laundering) checks on new vehicles and companies.
LPP started on its journey some time ago and I have to say that it’s immensely satisfying seeing it all come together. From early morning trains between Preston and London to countless conference calls and emails we are starting to feel like one company.
We’re only halfway through, and I suspect there are many more challenges lurking around the corner. However, we’ve seen the benefits of all the hard work we’ve put in thus far, and we know it will be worth it in the end, with the benefits feeding back to our partners through more stable, better funded pension schemes — and the lower levels of financial contribution that come with that.
Trevor Castledine is investment director and head of credit investment at Local Pensions Partnership.
