LGPS Central CEO Mike Weston warns that, without government intervention, the departure of the Royal Borough of Kensington and Chelsea from its pool could create a polarised LGPS as other ‘pooling sceptic’ funds seek to go it alone.
As we approach the five-year anniversary of Local Government Pension Scheme (LGPS) asset pooling and anticipate the government’s long-delayed consultation on the next phase of pooling, I have real concern that the reported move by the Royal Borough of Kensington and Chelsea (RBKC) to leave its London pool could have far-reaching and negative implications. Not least, it could distract the sector from its primary objectives of delivering long-term investment performance and management fee cost savings.
After almost five years, for those funds that have embraced pooling, it is unequivocally working. Investment performance is on a par with the industry, and strengthening, economies of scale are producing cost savings, investment governance has improved and there is more investment into infrastructure.
While some degree of patience is important, current DLUHC guidance effectively permits perpetual delay for those funds that would have preferred pooling had never happened.
Mandate missing
When pooling was introduced, individual LGPS funds were forced to be part of a pool, but there was no similar mandate applied on the scale, or speed, of assets to be transitioned into those pools. Over the last five years this has led to a broad spectrum of pooling progress across England and Wales.
While some degree of patience is important, as transitions into PoolCo products need to happen at the right time for individual pension funds, current guidance from the Department for Levelling Up, Housing and Communities (DLUHC) effectively permits perpetual delay for those funds that would have preferred pooling had never happened.
These pooling sceptics are the funds that are bearing the operating costs of their pools and not gaining any of the benefits. The pooling enthusiasts, who are transitioning the most assets, are reaping the biggest gains.
Over the last five years much has been written about the next steps for pooling. I commented recently on the practical difficulty of pivoting from our current geographic model of pooling to one based on centres of product excellence. The common theme has been progress; how pooling develops further and achieves the successes seen amongst our longer-established, and typically larger, overseas pooled public pension scheme peers.
I fear that without DHLUC intervention to force RBKC to remain part of a pool, we will see a domino effect across the sector.
Domino effect
Last week’s news from London is completely different. I fear that without DHLUC intervention to force RBKC to remain part of a pool (not necessarily its current one, but possibly if no other pool were willing to admit them), we will see a domino effect across the sector. Allowing RBKC to stand alone, outside of a pool, would encourage other pooling sceptic funds to pursue a similar course.
At best, managing these exits would be a major distraction; at worst, the whole thesis of pooling would start to unwind. Those funds that want to go further and faster with pooling would be prevented from doing so.
Over time a new model of pooling would undoubtedly emerge. One possibility would be a polarised LGPS. New groups of enthusiast funds would drive the pooling agenda forwards. Separatist funds would revert to their previous standalone operating models. But while this, or any other new model of pooling develops, the ultimate losers would be the thousands of local employers who fund the LGPS and the millions of individual LGPS scheme members.
Along with my fellow PoolCo CEOs, I await the new pooling guidance consultation from DHLUC, and hope that the commitment in chancellor Jeremy Hunt’s recent Edinburgh Reforms speech becomes reality. I hope that the guidance is forthright and clear to avoid any potential distractions or deviation from our collective pooling purpose.
I firmly believe that now is the time to be pushing pooling forwards, not retreating backwards to the fragmented, sub-scale and over costed pre-2015 model.
Mike Weston is chief executive officer of LGPS Central.
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