In the eight years since then chancellor George Osborne announced his ambition to pool the assets of local government pension schemes (LGPS), the UK has had no less than seven chancellors. While they all belonged to the same party, their policy visions have at times been vastly different.
One aspect that united them is a shared ambition that the LGPS pools could become something akin to a sovereign wealth fund for the UK. A greater concentration of assets would offer a convenient plug for the UK’s infrastructure funding gap and a source of funding for the private sector at a time when the government needs to tighten its purse strings.
That, of course, is not how the LGPS pools see themselves. Having said that, pooling has accelerated rapidly, with eight such entities firmly established, and managing most of their member funds’ assets.
Enter Jeremy Hunt’s spring Budget in March, which perhaps marked the biggest political turning point since the launch of pooling in 2015. The relatively new chancellor made it clear that he would like to increase not only the pace, but also the speed of pooling, with all listed assets to be transferred to a pool by March 2025.
The government also wants to see a smaller number of pools with assets of at least £50bn. While the consultation is ongoing, this announcement could trigger significant changes to the pooling process, but there could be pitfalls along the way.
Same but different
When the government first launched the proposal to pool assets, it combined an ambitious timeline with deliberately ambivalent targets. Within a few months, authorities were asked to submit their proposals for pooling, with each “sovereign wealth fund” managing at least £25bn in assets. At the same time, the definition of what constitutes a pool was left open, allowing for the emergence of different setups.
On the one hand, pools like Local Pensions Partnership (LPP), which have relatively fewer partner funds, took responsibility for managing their funds’ assets from the beginning, becoming their custodians.
Border to Coast was established as a regulated manager in 2018 with the partner funds acting as shareholders. LGPS Central pursue a similar model.
All three pools are FCA-regulated and Mifid II-compliant with an Authorised Contractual Scheme (ACS) structure and offering an in-house investment management capacity. Crucially, while the pools provide support on asset allocation, the decisions are ultimately taken by the partner funds.
Then there are Access and Wales Pension Partnership, which are also Mifid-compliant and operate a rented ACS structure, where the investment management is outsourced.
Brunel Pension Partnership, which is also FCA-authorised and Mifid-compliant, has outsourced its custody and fund administration. It uses a combination of internal and external management.
London CIV also has an ACS structure but has struggled to convince all its partner funds to transfer their assets. Unlike other pools, it has 32 partner funds whose interests need to be united. A daunting task.
Meanwhile, Northern LGPS started pooling its illiquid assets whilst keeping the management of the liquid, listed exposures with the individual partner funds.
These include West Yorkshire, which has long-standing in-house capacities while Greater Manchester has active mandates with external managers.
It appointed an external FCA-authorised custodian two years ago to ensure all its listed assets are within a single authorised entity. But the asset allocation decisions remain within the individual partner funds.
In a nutshell, the eight funds have opted for different approaches to pooling, a fact which could become a challenge, should the government wish to see them join forces.
Deadline pressure
Despite the absence of a clear definition of what constitutes pooling, the government now paces ahead with the demand that all listed assets should be pooled within the next two years. At first glance, it seems as if the pools should meet this target with flying colours.
Border to Coast and Brunel have transitioned more than 80% of their clients’ funds, putting them on course to meet the government’s target. Similarly, Access says it has pooled £32.7bn, which accounts for more than 80% of its partner funds’ combined £57bn of assets.
Meanwhile, in March 2022, London CIV managed 57% of its client funds, while just over half of the assets belonging to LGPS Central’s member funds have been pooled.
It remains to be seen how the government’s consultation will assess Northern LGPS’ approach, but the pool is confident that it complies with the rules, given that it is not a separate legal entity but uses a joint committee structure and has a joint custodian.
LPP also describes itself as 100% pooled, given that partner funds handed responsibility for all of their assets to the pool at inception.
But the picture changes somewhat if pooling’s progress is being assessed from a bottom-up, rather than a top-down perspective. When considering the progress of individual partner funds to pool their assets, it appears that some funds have failed to commit any of their assets to their pool and remain reluctant to do so.
This was brought to the public’s attention when some of London CIV’s partner funds – the Borough of Bromley and Kensington and Chelsea – announced they were considering leaving their pool. It also emerged that Bromley is yet to pool any of its assets.
For William Bourne, a principal with Linchpin, a consultancy, the root of the problem remains the lack of a clear definition. “We desperately need some more direction from the Department of Levelling Up, Housing and Communities because there is a great deal of uncertainty in a whole range of areas, whether it is governance or pooling,” he says.
Chris Rule, LPP’s chief executive, seconds this view, arguing that the government’s lack of long-term vision is a key reason for reluctance among some funds. “The government has been imprecise and not set out a clear directive and that has resulted in inertia. There are still a lot of conflicting views, there is mixed appetite, too many decision makers, such as consultants and asset managers, and it’s not necessarily in their interest to see further pooling. There are all sorts of agents out there that can muddy the waters.
“What the government can do is be a bit clearer and provide requirements to be a bit more transparent, for example about costs and performance so that you can compare apples with apples and see what was successful and what hasn’t been,” he adds.
Is bigger always better?
For some in the industry, the government’s sudden rush to increase the pace of pooling is in large part motivated by an interest to attract LGPS cash. “If you go back in history, the government has always had a different idea of what pooling means to what the LGPS has,” Bourne says.
“The government has always seen it as a vehicle to finance their projects, which is 100% not what it should be about. These are pension funds; they are there to pay pensions to their members who ultimately own that money. So there is quite a bit of conflict between these two.
“Where the government is right is to look at achieving cost savings,” he adds. But this raises the question whether bigger funds always deliver better outcomes, a premise which Bourne questions. “One of the reasons why they pushed for pooling is to push for scale but I am not convinced that you need bigger scale to get lower costs.
“I can see that it ought to be helpful because you can spread fixed costs over a higher number of assets but the Wales pool, for example, has done this by outsourcing to a private sector consultant and that is an equally efficient way of doing it,” he says.
While Chris Rule agrees that bigger funds offer economies of scale, he also predicts that solely focussing on the size of a fund could offer pitfalls. “For me, bigger won’t be better if it is fragmented. If you end up having a bigger pool of assets that isn’t actually pooled you can talk about a big number but that isn’t effective scale,” he says.
Richard Harbord, a consultant to LGPS funds, is sceptical of the government’s aim to reduce the number of pools. “It seems to me that cutting down the number of pools could cause chaos because the partner funds would have to move and some have only just put their investments into the pooling system. So that could cause huge upheaval and I am not quite sure of the benefits,” he says.
Collaboration or competition?
The government’s focus on scale has the potential to change the tone of the debate around pooling. One factor that makes LGPS unique in the financial services industry is a strong element of collaboration.
Pools have been working together closely on infrastructure investments. GLIL, which joins up pools and even a defined contribution provider, is a case in point. It was established to provide more efficient infrastructure investments. Another example is collaboration on shareholder engagement, with various pools joining together to increase their voice as shareholders.
But with all partner funds having committed to a pool, could the government’s focus on the size of pools introduce a process of increased competition between pools to attract partner funds from other pools in order to increase their size?
For Bourne, this scenario is on the cards, and that might not be a bad thing. “There are two different visions here and you’ll find passionate defenders on both sides,” he says.
Bourne warns that if a fund’s committee members are effectively being forced to remain in a pool which they believe offers poor investment outcomes, this could conflict with their fiduciary duty to act in the best interest of their members. Instead, they should be free to move between pools.
“My view is that the government should let funds move either assets or even to different pools,” he says. “This keeps everybody honest. You get a process of Darwinism whereby the better pools will attract money from other funds.”
A question of accountability
The Royal Borough of Kensington and Chelsea and the Borough of Bromley ultimately decided to stay with London CIV, a decision which may have been influenced by regulatory pressure.
While the government has no jurisdiction over the pools, it does have jurisdiction over the funds and in an extreme case, the secretary of state could intervene and remove the administering authority.
But this raises a whole number of governance questions, which go far beyond London CIV. Who assesses whether a pool underperforms? And should funds be allowed to leave if they are dissatisfied?
For Harbord, this could be a potential source of conflict. “I have always thought that the trouble would come when some local authority would put its money into a pool and doesn’t feel like it’s going to get enough return. So what do they do about it? They can take their money out and put it into another fund but they can’t put it into another pool so they are stuck.
“Eventually, there are going to be cracks appearing on this and there is not any regulation to deal with that, so it is an imperfect system,” he says.
Bourne also sees governance issues as the more important challenge to be resolved. He argues that the need for better governance standards has two elements. On the one hand, there are the funds which should be holding the pools to account and on the other, there are the pool boards holding their management to account.
“My killer question is: could any LGPS pool do what Alecta [the Swedish pension fund] did and re their chief executive? I don’t think any of the pools could do that,” Bourne says.
While the government’s consultation is pending, the mood among LGPS suggests the government might receive different responses than they might have anticipated, Rule says. “The government wants the investment, but I am not sure that bigger gets them there.
“It’s about making sure you have the right investment governance. No one is going to invest in anything because the government thinks it’s a good idea, they are going to invest if they think it’s a good investment,” he adds.
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