The director of pensions for the West Midlands Pension Fund talks to Mark Smulian about the success of the LGPS pools, the journey to net zero, government targets for infrastructure investment and competing priorities for the LGPS.
Pooling has been a positive step for the Local Government Pension Scheme (LGPS) and has delivered some unexpected benefits, Rachel Brothwood has told Room151 in an exclusive interview.
The director of pensions for the West Midlands Pension Fund was speaking ahead of the Pensions and Lifetime Savings Association (PLSA) local government conference. Brothwood, who is chair of the PLSA’s local government committee and a speaker at the event, said that pooling “had initiated change and been successful in delivering greater collaboration and a stronger LGPS voice”.
“It has also given us scale in markets, and brought greater depth, breadth and knowledge to our sector, as well as raising the LGPS investor profile.
“Value for money was very much a driver – and there are signs this is building – but pooling has also delivered opportunities to invest differently and has changed the level of expertise readily accessible to the LGPS.”
Accessing private markets
She gave the example of pension funds’ increasing allocation to private markets “which can be more difficult to access as individual funds, and there’s often greater opportunity for investors who can go to the market with scale, as the pools do”.
Private markets deal in assets not traded on public stock exchanges such as property, private equity and infrastructure.
Pools have certainly given the LGPS market clout. As an illustration, Brothwood’s own West Midlands fund has assets of £20bn and covers 800 employers – many of them academy schools – but forms one-third of the assets of the LGPS Central pool, which also covers funds from Shropshire, Cheshire, Derbyshire, Leicestershire, Nottinghamshire, Staffordshire and Worcestershire.
There has been some discussion of the merits of pension funds being in more than one pool for different purposes. “That could allow for specialisation, but it makes governance more complex,” she said.
“I wouldn’t underestimate the challenge. There are eight pools, and they are all different in how they have come together to support their founding pension funds but there will no doubt be evolution as we continue to collaborate and explore further opportunity to add value.”
[Private markets] can be more difficult to access as individual funds, and there’s often greater opportunity for investors who can go to the market with scale, as the pools do.
The pools as activist investors
One area of perennial debate is whether the LGPS should be an activist investor, and the extent to which this could conflict with its fiduciary duty to raise sufficient returns to meet liabilities.
Pools have committed to ambitious net-zero targets, which could lead them into investments aimed at combating climate change. Should it back these or “stick to its knitting”?
“There are undoubtably opportunities for investors during the transition and many different and developing climate solutions – we are mindful that not all of the good ideas will deliver a return, so diversification is important, as is enhanced due diligence, to ensure balance of risk and reward. Strong alignment with a pension fund’s underlying investment beliefs is important,” said Brothwood,
She sees a potential alignment though between investing to achieve net zero and making sufficient returns. “Net zero is a long journey, and its dependent on many parties playing their part, but it’s a future we value and aim to continue to secure good returns as paths converge,” she suggested.
“Those companies and organisations focused on long-term sustainability that are thinking about and preparing for climate transition are more likely to do better over the long-term.”
Stakeholder capitalism
Brothwood was among a number of senior pensions figures who in February signed a letter to the Financial Times in which they argued that companies should engage with all stakeholders.
This approach was not a matter of being “woke” they wrote, rather that stakeholder capitalism would “unleash mutually beneficial relationships to create long-term value”.
Signatories suggested that, in some quarters, commitments by businesses to better manage carbon risks and to engage constructively with stakeholders “are increasingly decried as somehow endangering long-term value creation. We wish unanimously to reassert that our experience, and the evidence, show the opposite”.
They also argued that growing corporate emphasis on sustainability and the drive to net zero needed to intensify, and difficult trade-offs “need to be explicit, open and explained to stakeholders”.
She says of this letter now: “It’s important for investors to ‘call out’ misconceptions. The FT letter was written to highlight the value that can be created through engagement – long-term performance is enhanced where companies are open to engaging with employees, regulators and investors.
Those companies and organisations focused on long-term sustainability that are thinking about and preparing for climate transition are more likely to do better over the long-term.
Infrastructure investment
UK governments have periodically been keen that public pension funds should invest in infrastructure, and this is again a concern in Whitehall as part of the levelling-up agenda.
“Infrastructure investment has been talked about for many years and has been revived by the levelling-up agenda – it is a valid question that ultimately comes down to whether there are investable opportunities that provide appropriate returns within an acceptable governance and risk framework,” said Brothwood.
“Many LGPS pension funds already have infrastructure investments, including exposure to UK assets, and these can play a key role in providing diversity within a portfolio.”
The number of infrastructure projects that hit problems under the former Private Finance Initiative shows the challenges that can be involved, and Brothwood believes that government can act to de-risk a project and incentivise capital flows “which can make for more attractive investment and unlock opportunities”.
“The government has talked of encouraging LGPS pension funds to consider putting 5% of investments into infrastructure. But we have a common purpose and a function to invest over decades to deliver pension benefits to our members. It requires consideration of our fiduciary duty first.
“Right now, the LGPS has many other competing priorities and statutory responsibilities to meet – consulting employers over the triennial funding valuation, reviewing investment strategy and stewardship in light of the shifting geopolitical and economic landscape, implementing the McCloud remedy and gearing up for increasing pension member engagement through pensions dashboards.”
The Pensions and Lifetime Savings Association local government conference takes place on 13-15 June in Gloucestershire.
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