Question 1 - Do you consider that there are alternative approaches, opportunities or barriers within LGPS administering authorities’ or investment pools’ structures that should be considered to support the delivery of excellent value for money and outstanding net performance?
BW are supportive of the aims of LGPS pooling in realising fee savings through scale, providing greater and more efficient access to alternative assets and further increasing the levels of professional and good governance which the LGPS displays. The comments included below should be read within the context of that support.
Increased scale through fewer pools
The consultation sets out a view that fewer, larger pools would be beneficial to the LGPS but does not back this up with any evidence nor does it include any proposals on how this may be achieved.
With regard to scale there is indeed evidence that larger mandates can provide substantial fee savings provided the right manager is selected (for example The Truth About Scale Discounts In Asset Management) but there is no evidence that larger pools in themselves would necessarily result in larger mandates or better manager selection. For example pushing together passive mandates will give a bigger pool but won’t guarantee material cost savings.
The focus should, and indeed appears to be in other parts of the consultation, on reducing the number and increasing the size of mandates within existing pools while seeking to improve manager selection processes.
Regarding the methodology for achieving fewer, larger pools there does not appear at present to be any incentive for pools to voluntarily merge, indeed the approach of government to date has been one of effectively freezing the position as at the inception of the existing pools. Furthermore the consultation’s unease with inter pool competition would appear to rule out any route for the organic growth of some of the pools.
Focussing efforts on reducing the costs of investing in private markets and preventing pools from inadvertently competing with one another for the same assets would be more beneficial in our view. (see specialisation below).
Collaboration and specialisation
We would support greater collaboration between pools and in particular the specialisation of some pools in some areas of investment. Such specialisation in the areas mentioned in the consultation, including in-house invested funds, would enable larger mandates to be achieved and potentially avoid duplication and increased costs in those areas.
Successful private market investment is borne out of available assets and personal relationships/networks. Its illiquid nature means stability of investment team and ongoing knowledge of the underlying assets - not simply marketplace - is a key to success. Against a remuneration backdrop that may not be competitive compared to those of private sector private market investment staff, there is a risk that turnover is higher at pool level and risk increases as a result of the loss of specialist knowledge.
By fostering a cross pools methodology for accessing private markets (e.g. a specialist pool that all other pools could invest in) for the areas of private markets discussed later in the consultation could lead to meaningful savings and reduce the risk associated in high turnover in personnel at individual pool level.
We do not however agree that forcing LGPS funds to access such specialised vehicles via a fund or sleeve created by their own pool is a cost-effective way of achieving this outcome. Provided that the local pool has been consulted, a direct investment by the LGPS fund into the specialist fund of the other pool would seem a more appropriate and cost-effective route to take.
In house management
The consultation endorses the use of in house management in some pools and suggests that other pools may achieve significant fee reductions by embracing.
To an extent this view is borne out by the activities of other large UK pension schemes, for example:
- RPMI Railpen which manages £31 billion of assets on behalf of the railway pension schemes, announced plans to internalise its trading desk in the summer of 2021. This follows substantial growth in Railpen’s trading activity over the past few years.
- USS Investment Management is a wholly-owned subsidiary, and the principal investment manager of the Universities Superannuation Scheme Limited, trustee of one of the UK’s largest pension schemes. USS IM invests nearly 70% of the scheme’s defined benefit assets (over £75bn) directly placing the remainder with complementary external managers.
Regardless of these examples we would urge caution in this area in order to maintain the focus of LGPS funds on pooling their liquid assets, developing effective private market strategies and further improving on the management of both. The reluctance to pool exhibited by some participants may be an indicator of a lack of trust at some level in the current approaches. Pushing for a move to a substantially internally managed approach may increase that reluctance. Consequently, whilst it may lead to fee savings greater internal management may be better considered as a future evolution and not be a source of focus at this point in time.
For those LGPS funds who may wish to pursue this path we would agree that rather than creating in house teams from scratch it may be beneficial for those without access to in house investment via their own pool to be able to invest in this way via other pools which already have a proven track record in this area (but see our comments on collaboration and specialisation above).
Long term investors?
The LGPS is a long-term investor however this can, to some extent, be both obscured and disincentivised by short term fluctuations in asset values especially when looking at private market and venture capital type assets. Measuring performance over a short time period (for example as part an automatic review following a 3 year valuation process) could produce results which lead to pressure to divert from a long-term strategy including illiquid assets which have a much longer return period.
Accordingly it would be helpful if guidance could include the extent to which for LGPS funds should/can consider longer term performance measures and/or asset smoothing mechanisms.