Room151’s new LGPS Quarterly Briefing comes as local government pension funds stand on the cusp of radical change. Pooling, the project to consolidate all 89 LGPS funds into eight groups, giving them greater scale and potentially greater savings, is well under way for the 2018 deadline.
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It wasn’t always this way. Progress had be no means been seamless since the September 2015 announcement by the then chancellor George Osborne that the structure of LGPS should be overhauled, as was to be expected with the interests of 90 odd pension funds at stake. But with the result of the EU referendum, and a new broom sweeping through the government, there was a sharp intake of breath; surely a government so preoccupied with Brexit would not have the energy to see home the relatively parochial ambition of consolidating local government pensions?
Commitments
Just days after the Brexit result, LGPS funds were warned to monitor their assets because volatility in the wake of the referendum could affect the performance of growth assets. Within a few short weeks the message changed and insiders were voicing serious concerns about the possibility of pooling being delayed. The fear in pools across the country was that with an already tight deadline, any Brexit-induced delay could cause a real threat to being ready on time.
The question on everybody’s mind was whether new chancellor, Philip Hammond, was as committed to pooling as George Osborne had been, or would his work on Brexit prove a major distraction? As the day of Hammond’s first Autumn Statement approached in November, all anybody in LGPS wanted was clarity on the way forward.
The chancellor’s statement failed to offer reassurance but it wasn’t long before the direction of travel became clear. It seemed that amidst the flux and rumour, Marcus Jones MP, minister for local government, was plodding on with the job in hand, setting up meetings and checking on the pools’ progress. Just seven days after Hammond’s statement LGPS Central and Welsh Councils became the first two pools to receive the all-clear in writing from Jones and to move forward.
A month later and Border to Coast, the largest of the proposed pools with £36bn under management, also received a green light. Brunel Pensions Partnership and the London CIV were told they were cleared to continue this month. To date six of the eight proposed pools now have the go ahead, the most recent being Local Pensions Partnership.
Doubts
That’s not to say that pooling has been without controversy. There are those that have raised fears and highlighted unresolved issues. Some have even considered postponing the process entirely.
In July Hugh Grover, chief executive of the London CIV, warned that member funds would need to compromise over investment strategy, a reminder, perhaps, that administering authorities will inevitably see change to their relationship with funds.
Doubts also remain about the reasoning behind the entire project. In the first issue of the LGPS Quarterly Briefing Trevor Crossely, an LGPS consultant, argues that pooling is built on “flimsy policy analysis” and “false comparisons with foreign investment frameworks”. LGPS pooling remains nothing if not controversial.
Perhaps the biggest concern was the government’s aim of having pools invest in infrastructure developments. Administering authorities were obviously disturbed by this. Their position was that the funds had autonomy to make their own investment decisions without intervention from central government. The LGPS Advisory Board even called on Theresa May’s new government to clarify whether it intended to enforce infrastructure investment.
But the fears were allayed in a speech by the chancellor to much relief and infrastructure fears receded.
Asset allocation
Despite its ups and downs many are now looking forward at what they see as the big issue for administering authorities: asset allocation.
The issue is high up the list of priorities for Mike Jensen at Local Pensions Partnership who says allocation is the most important issue in pension fund management; regular Room151 contributor, and LGPS expert, John Harrison outlines four key factors underlying allocation; meanwhile Nick Vickers, head of financial services at Kent County Council and Toby Nangle at advisory firm Columbia Threadneedle share their allocation approaches.
And that is coupled with good news in the wind for LGPS. According to Barry McKay of Hymans Robertson, the soon to be published triennial valuations will show that LGPS is improving with material increases in funding ratios. One fund advised by Hymans is up by 7%.
LGPS is on a journey with everything that entails: discord over the route and continued disagreement over the destination. But the journey is incontrovertibly underway. The Brexit result presented an external threat to the project but the crisis many feared did not materialise. Most minds are now no longer distracted by the strategic decision, but on the detail of how it will work. Much is still to be resolved, and there will certainly be difficulties ahead. But LGPS management is set to change profoundly. About that there is no doubt.
