Five years after Osborne’s announcement to merge LGPS assets, portfolio institutional brought Laura Chappell, CEO of Brunel Pensions Partnership, Rachel Elwell CEO of Border to Coast, Kevin McDonald, interim director of the ACCESS Support Unit and Mike Weston, CEO of LGPS Central together to discuss how their plans are progressing.
portfolio institutional: How have the first five years been?
Laura Chappell: Busy. Our total partnership is £33bn and we have transitioned £21.5bn, so about 65%. For us, the proof is in the transition. We have sped through it and kept within our costs. We have invested in new assets and are getting intangible benefits from pooling.
Rachel Elwell: When George Osborne said: “You shall pool,” it took years for everyone to work out how to do that. We went live in July 2018 and have since been working with our partner funds to develop the capabilities they need. It is important that the pool is set up to help the partner funds implement their strategy. Therefore, we need to be flexible to meet their needs. It takes a lot of planning and a lot of talking to make sure that what is being built is what’s needed.
Kevin McDonald: The chancellor’s 2015 Budget fundamentally altered how the LGPS views investment. We are either talking about assets that have been pooled or how we should approach what we have yet to pool. The lens has shifted, and pooling is responsible. ACCESS’ authorities have a number commonalities, which eased some of the decisions on how we would approach it. There was no legacy of internal management as the authorities employed external managers. Within the alternatives sphere there is a degree of diversity in how those funds have invested, for listed funds there was a lot of overlap.
Mike Weston: We have achieved a lot, but there is still a lot more to achieve. The initial business plans that were put together in the pools’ pre-launch period were optimistic. If you look at our original plan, all the assets should have transitioned by now, but we are only halfway through the journey. When you get things up and running it is more complicated than anyone had imagined. We need to make sure that our eight partner funds are happy and moving forward at the same speed. We have FCA restrictions and requirements, which is new for our local government colleagues in the pool. The difference between theory and practice has been large, but we are making progress in asset transitions and launching new funds. It has been hard work and challenging and it will be going forward, but the end prize is still as great as ever.
PI: Have you invested in UK infrastructure as the government hoped that you would?
Elwell: Infrastructure is a good investment for a pension scheme, but the LGPS is not a sovereign wealth fund. It is important that what we invest in meets the needs of the pension funds. We invest in infrastructure in the UK and globally. Half of the £1.5bn we invest in private markets each year is in infrastructure, such as renewable energy, but it is not about solving any funding gaps that the UK government might have.
Chappell: What we invest in must make sense financially for our partner funds. Brunel has a strong sustainable investment stance and in UK sustainable infrastructure there are going to be more opportunities going forward. We have an allocation to infrastructure, but we look at it globally because we have to do right by our clients.
Weston: Real assets, like infrastructure, are an inflation hedge and positive cashflow generator, if you get the right assets. As schemes increasingly focus on cash generation to meet their liabilities, these assets fit into that framework. We have an infrastructure fund that should be up and running shortly.
McDonald: There is a fiduciary duty to which those undertaking LGPS investment decisions need to have regard, so infrastructure will not have UK exclusivity. Most of ACCESS’ activity has been in the listed space, but we have been working on how our constituent authorities can invest in illiquids in a pooled way. We want to cover infrastructure, real estate, private debt and private equity.
PI: Cutting costs is a benefit of pooling, but have you discovered any additional benefits?
Elwell: With scale comes a collective voice. I have joined the Investment Association’s board, which is, in part, a recognition of that. Historically, asset managers have been strong while asset owners have been splintered. If you bring pools together you get a stronger voice and a more sophisticated buyer, which means that relationship between asset owners and asset managers is shifting. If you have strong asset owners, then you will have strong asset managers.
Chappell: Collectively, as pools we are large institutional investors, which gives us buying power and a big voice. We use that voice in the responsible investing space. Benefits of scale enable us to move quickly, particularly when it comes to stewardship where voting with one voice gives us more power. An advantage that we will see in the future is on the journey to net zero. That journey is going to be easier if we are pulling in the right direction. We will make strides more quickly than just being a small pension scheme. The benefits of scale are going to be enormous. McDonald: We are procuring advice to position what we do on RI, be it the Stewardship Code or climate-related disclosures. These issues are coming down the line and expectations of institutional asset owners are going to increase.
Weston: One of the benefits of cost saving is to improve investment performance, which is the most important thing that our partner funds need to pay their pensions. Then there is resilience. You now have 60 people running your assets, so there is much better resilience and support for the pension scheme.
PI: Aside from stewardship, are you guys working together and sharing ideas?
Chappell: As pool CEOs, we catch up regularly to share ideas and had a few meetings to compare notes at the beginning of Covid. Aside from that, we have collaborated on investment, tax savings, fee savings and sharing information on private markets. There is going to be more collaboration across the pools, especially as we move out of transition and into business as usual, where in managing the portfolio more opportunities will arise, especially with RI. There is no competitive advantage for a pool, so it is not an intellectual property decision. This is about doing what is right.
Elwell: Pooling has never been done in the UK before, so learning from each other is important. If our investment teams work together, we can generate cost savings because of the LGPS’ scale. There are many ways we are working together. The CEOs get together regularly but so do the COOs and chief risk officers. We are trying to encourage the spirt of collaboration because it is part of how the LGPS works. Ultimately, we are responsible for running public money. This is about how we get the best for the taxpayers and scheme members. That is by sharing and working together.
McDonald: Collaboration is happening and happening in a beneficial way. ACCESS has a different model to the other pools in this discussion but still joins the chief operating officer discussions. Because of the way ACCESS procures an operator, we do not share the issues or challenges of the other pools, but there are commonalities. We have had conversations with COOs over Brexit and remote working. The issues may be hard and soft in terms of investment, but they are relevant to all of us and the more we talk, the more we understand, the more we learn.
Weston: We are fortunate that the pools were set up to serve their partner funds. So, we are not in competition with each other, which means we can collaborate. We all deal with similar issues and experience the same challenges, as a group we constructively talk about what is happening with pooling and how it moves forward.
PI: Some of you have launched funds and awarded mandates during Covid. How did you approach that process during a pandemic?
Elwell: At the start of the first lockdown we launched a £2.5bn Investment Grade Credit fund and in the autumn a £2bn Index-Linked Gilt fund. We also appointed multi-asset credit and emerging market equity managers. It required us to think carefully about the controls we have and how we can make sure we are still doing those in a virtual environment. So, there has been more contingency planning and testing. It requires more thought and is harder, but it is not that you cannot do it. Just be aware of the risks and how you are going to manage them differently when you are in lockdown.
Chappell: We launched three funds before the US election. It was harder, not least because when you are selecting managers you cannot meet them face-to-face or go to their building a get a feel for their culture. We are looking at long-term partnerships, building something for the future. So, it takes longer.
McDonald: Launching funds requires a different approach. Remote and virtual working is not the look and feel of how we would have done transitions in the past, but the industry has stepped up.
Weston: Part of pooling was to do investment in a different way. Covid has also forced us to do investment a different way. This is just another challenge to overcome on the pooling journey. There is a commitment from us and our partners funds to continue doing what we planned to do. There was no assumption that Covid would cause a delay. We launched a corporate bond fund, selected managers for emerging market debt and multi-asset credit. That activity is going ahead, we are just doing it in a different way.
PI: You follow different investment approaches. Could there be pressure from government to adopt an industry-wide standard?
Elwell: Central government has been good at setting principles but respect that the pools need to do what is right for their partner funds. There are five operating models across eight pools. Those have evolved because they were the right way to deliver for the partner funds. When the partner funds elected which pool to join, they did that in cognisance of what they wanted to build. I do not see pressure from central government to change that. But over the next 15 years, who knows what could happen. There could be change but I do not see pressure in the short to medium term.
McDonald: With 89 local authorities at the time of the 2015 announcement, it is not a surprise that when the pools developed that there were different approaches. We have eight pools which are at different stages of progression and so it is too early to make like-for-like comparisons. If you cannot do that then drawing conclusions about one approach over another is premature. We do not have enough evidence to make hard and fast conclusions about Model A and Model B, and we will not be able to have proper comparisons for some time.
Weston: It is dangerous for the government to tell funds where to invest. Our understanding is, that following a Supreme Court judgement, the next step is for regulation to replace guidance. That regulation is not going to tell us where to invest, it is more likely to focus on if we should be FCA regulated. There will be changes going forward, that is inevitable. What they are, we do not know but we will react and fall back on those principles of having to deliver investment performance for our clients.
Chappell: There will be a natural evolution over time of what models and approaches work. It is not going to be dictated by anyone. I would be worried by a government trying to dictate an investment approach. Most of us set up as FCA-regulated fund managers to make sure that we are competent to do the job.
PI: Finally, what challenges do you expect in the next five years?
Weston: The first thing is to get through Covid and whatever it throws at us. The challenge then is maintaining the momentum that was established in the first couple of years when we were transitioning large amounts of assets into the public market asset classes. We then need to manage the challenge of moving into the business-as-usual phase.
The focus moves from creating new stuff to making sure we are efficiently managing what we have and adapting to the changes that will come along. Ultimately, the challenge for any asset manager is delivering the investment performance that our clients expect.
Elwell: It is not just about getting through Covid but making sure that the culture work that we have been doing in my team and with the partner funds is stronger coming through this. From a leadership perspective, that is my single biggest challenge. The LGPS has come a huge way over the past five years. What does the next five years bring and how much change is needed is something that we will discover together, I hope.
McDonald: Building on solid foundations. It feels as though we are generally halfway there.
Chappell: In the next six months we need to launch our fixed income funds and then we are, more or less, done. We are already turning our attention to the future and what that looks like. We are thinking about how to innovate in this environment. We are looking to move the portfolios towards that net zero journey. We have the bedrock almost done and then it is about planning into the new world that we are going to be living in because the pace is fast. There is not going to be any let up. If anything, it speeds up a bit.