DCLG sets out terms for LGPS asset pooling

The UK government does not care what structures local government pension scheme (LGPS) funds use to pool assets, as long as the pooling arrangements meet their criteria according to Jeff Houston, head of pensions at the Local Government Association.

Houston was speaking at the Westminster Question Time on LGPS collaboration, organised by LAPF Investments and held on November 26^th, the day after the government published its criteria for the reform of the LGPS. Houston told an audience of LGPS representatives, consultants and asset managers that the current approach was the third proposal, after merging assets and liabilities into five funds or making it compulsory to invest passively in listed assets had been strongly rebuffed by LGPS members. Under the latest proposals, the government wants to see around six pools of assets set up with least £25 billion per pool. While it was accepted that moving all assets into the pools could take years, LGPS funds are expected to submit initial proposals by February 19th, with more detailed submissions by July 15th.

A Department for Communities and Local Government (DCLG) paper has set out the four key criteria for the 90 administering authorities in England and Wales (Scotland and Northern Ireland are not being included in the reform process). On size, pooled arrangements are expected to reach £25 billion, but this could take time. Pooled arrangements are expected to produce cost savings, again this could take time as set-up costs could be incurred. According to the DCLG paper, active management should only be used where it can add value for money and for listed assets, fees and net performance against a passive index should be reported.

In terms of governance, administering authorities will still be accountable to local taxpayers for their own performance and will make asset allocation decisions, with manager selection undertaken at the pooled assets level. Pooling arrangement should be structured to encourage long-term investing and should disclose their approach to environmental, social and governance issues. The pooled arrangements are also expected to have an improved capacity to invest in infrastructure.

As well as a £10 billion tie-up between the London Pension Fund Authority and Lancashire County Pension Fund, 31 London boroughs are collaborating on a common investment vehicle to pool assets, while several other LGPS funds are understood to working together, including funds in the South West, funds in Wales and in the Midlands and also Surrey, Cumbria and the East Riding of Yorkshire.