LGPS pooling – taking an FCA-regulated approach

15 Apr 2016

By By Michael O’Higgins

The Local Pensions Partnership Ltd (LPP) is the Asset and Liability Management partnership jointly set up by Lancashire County Pension Fund (LCPF) and London Pensions Fund Authority (LPFA), which launched on 1st April, 2016. LCPF and LPFA started collaborating over 18 months ago to build a not-for-profit organisation that had “asset pooling” to achieve more cost-effective asset management as one of its ambitions.

But, also, and much more significantly, both funds wanted to achieve a critical mass to deliver significant economies of scale and improvements across all of their respective operations, leading towards better management of the liabilities of the respective funds, improved fund stability and long-term deficit reduction.

So our Asset and Liability Management partnership was established, with the firm conviction that optimum long-term deficit reduction will only come about from the effective management of our assets and liabilities together.  In effect, we will achieve this through the close integration and interaction of regulatory compliance, employer risk management and pension administration together with asset and liability management and reporting.

On the liability management side, we will be investing in building up our existing in-house risk management expertise.  Our drive is to support greater fund stability, starting with better employer risk management through regular and comprehensive assessments of the strength of each employer’s covenant. These assessments provide assurance as to the strength and reliability of all employers in the fund, reducing the risk of multi-million pound liabilities falling on the employers should one of their number fail to meet its obligations.

Success will be demonstrated, first, by consistent improvements, wherever feasible, in triennial funding levels which in turn means, for employers in the fund, more stable and, over time, reduced contribution rates. Secondly, the resultant asset mix will be one that delivers stable, lower primary contributions and investment returns in line with actuarial forecasts on a consistent basis.

Operational costs for both funds will also be reduced by combining our pensions administration services.  In the first year alone, we are forecasting around a £1 million cost reduction spread across both LCPF’s and LPFA’s administration.

On the asset management side, we’ve already conservatively identified investment management fee savings of around £30m over the next five years.  And our increased scale is forecast, again on a conservative and anticipated basis, to achieve investment outcomes of between £20-30m from current levels.  This is all good news for long-term financial improvement in the fund and, importantly, the business case is only based on the tangible outcomes we have identified, rather than the “anticipated” improved investment outcomes.

Pooling and why LPP chose the FCA-regulated Investment Operator route

The process of pooling the equity assets of shareholder funds is expected to begin from the end of May onwards. However the joint management of assets is already underway.  We will be pooling through the subsidiary company, LPP Investments Ltd, which is an FCA approved Investment Operator that will be managing an Authorised Contractual Scheme.  For the time being, we will be starting ‘small’, transitioning our equities, as Government has not yet implemented the changes to the LGPS (Management and Investment of Funds) Regulations 2016.  Without the freedoms these new regulations will permit, we’re currently limited to having only 35% of funds invested in a single investment vehicle. But, that won’t stop us from benefiting from joint management and starting to negotiate better arrangements with third-party managers.  We will also be bringing more investment in-house and expanding the existing global equity portfolio.

We chose the FCA-regulated route because we want to be able to provide the highest level of assurance to all stakeholders.  Although this route requires additional and, in some cases, much stricter requirements in terms of governance and reporting, it does provide, in the words of Government, ‘the assurance authorities, beneficiaries and co-investors require’.

Looking ahead

Clearly there’s a lot going on in the LGPS around pooling at the moment.  LPP is in discussions with a number of other funds, who share our commitment to holistic asset and liability management. This is very different to operating an asset pool. It is only through managing assets and liabilities together that we will achieve the twin goals of being able to plan our cash flow accurately and achieve long-term sustainable deficit reduction; keeping the lid on investment costs is only one piece in the jigsaw.  Effective ALM is a drum we’re not going to stop beating.

 

Michael O’Higgins is chairman of LPP Ltd

 

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