There are multiple paths to LGPS pool and fund success
The following article by ASU Director Kevin McDonald was published by Local Government Chronicle on 19 August
The outcome of the general election broadly aligned with forecasts of a number of pollsters: it produced a new party of government, with a Commons majority the scale of which has not been seen for 20 years. Labour in office now have opportunity.
Within the context of Local Government Pension Scheme (LGPS) investment pooling, the term broadly aligned is what we have also come to understand as the shared thinking on investment pooling between the two front benches in parliament.
Our new minister of state, at a renamed MHCLG, is Jim McMahon MP, whose appointment is welcomed especially given his background in local government as former leader of Oldham Council. Throughout the LGPS, practitioners and councillors are looking forward to engaging with him in a similar vein to his predecessor Simon Hoare.
Although the LGPS was not explicitly referenced within the King’s Speech, the new administration has hit the ground running, starting with a Downing Street roundtable on 22 July which included some pension pool representatives and the LGA.
Like its predecessor, the government is examining ways to “unlock the investment potential of the £360billion LGPS” with the promise of legislation if “insufficient” pooling progress is made by March 2025”. Its review will consider the “benefits of further consolidation”.
Whether legislation or mandation is either necessary or practical is a debate in itself and one that seems likely to accompany our foreseeable future, however a frustration shared by many pool practitioners has been the absence of an open, universal and consistent dataset on progress to date. It is to be hoped that the new CIPFA reporting requirements now in place provide the basis for much needed clarity, along with other datasets to ensure that any proposals brought forward by the new government are evidence based.
Chancellor Rachel Reeves used her inaugural speech to champion a new National Wealth Fund (NWF) to unlock green and growth investment, backed by a Taskforce led by former Bank of England Governor Mark Carney. It is good to see Brunel Pool CIO David Vickers as a member as well. Quite naturally there will be questions to explore and due diligence to conclude before decisions are made, however initial indications point towards a considered initiative.
The NWF focuses on domestic investment, environmental objectives and co-investment alongside national government – quite an alignment itself. It also appears to represent something of re-set when compared to previous dialogue that accompanied expectations around LGPS investment in levelling-up.
So where does the LGPS now find itself?
One starting point will be the progress reports each LGPS Authority was requested to provide by 19 July by the previous minister. This included expectations on the relative amount of pooled listed assets by March 2025 and the potential to achieve long-term savings through fund mergers or larger pensions authorities.
In terms of domestic investment, ACCESS finished the year with over 20% (almost £10bn) of pooled assets invested within the UK. Of course we are not the only pool to have this degree of domestic exposure, and changes to the reporting regime allow the LGPS to amplify what will be an important aspect of the new government’s aspirations.
ACCESS operates an outsourced model which is different from a number of the other LGPS pools. It is an approach that is based on utilising the market to source investment expertise and advice. Key to this is outsourced fund operation to an independent third party Authorised Corporate Director (ACD). This model has a number of merits. It underlines demarcation of roles since the operator is independent from the investment managers it appoints; the operator can be put to re-tender periodically (something we are in the process of conducting at present); there are channels for redress if required; and, through the fund operator, ACCESS benefits from access to best in class managers that can be changed in future. A similar model is being applied to pool private markets investments. ACCESS has appointed an external implementation advisor who is responsible for selecting private markets investment managers.
Our approach has enabled the following:
- £29bn, within the ACS, for which Waystone act as independent third party operator, invested across UK & global equity, fixed income and DGF sub-funds and £12bn with UBS for passive strategies. We asked Dr Chris Sier from ClearGlass to benchmark our listed asset CTI investment fee data and he concluded our approach has resulted in a 27% fee saving compared to market.
- A significant recent expansion in the non-listed offer to ACCESS Authorities. Through our Implementation Adviser Apex, ACCESS has seen over £2.2bn already invested within UK and Global Real Estate, with more investment pipelined. In line with government ambitions, we are launching an initial £130m in Social Housing, in addition to £800m in Timber. A further £1.7bn has been allocated to Infrastructure, and we progress searches in the private equity, private debt and impact spaces.
Our work as a pool has been achieved through the collaboration of 11 Authorities whose approach to investment aligns building strategic partnerships and the procurement of best-in-class providers.
Last year’s government response to the Pooling Consultation suggested that revised guidance on a pooling model “will be based on characteristics and outcomes rather prescribing particular structures” [1] and ACCESS looks forward to being part of that conversation. We hope this is continued and that the new government recognises that there may be multiple paths to success for both pools and individual authorities.
Ultimately the fundamental reason this is all happening is about people – over six million LGPS members in England & Wales of whom over 1.2 million constitute the membership of the 11 ACCESS Authorities. As Angela Rayner, the deputy prime minister and our new secretary of state rightly said, the LGPS exists to provide “dignity and security in retirement”.
While it is still very early days for Labour, its intentions and ambition for growth are clear and understandable. Building on the recent dialogue, renewed engagement between the LGPS sector and government represents an opportunity not to be missed.
Kevin McDonald is the Director of the ACCESS Support Unit and will be speaking at the LGC Investment Summit in Birmingham 12-13 September 2024.
[1] Local Government Pension Scheme next steps on investments: government response 22 November 2023 paragraph 50.