Strategic asset allocation – views from the coalface

Written By: Andrian Meyers Head of Pensions Investments Sutton and Kingston

The second morning of the LAPF Strategic Investment Forum at The Grove Hotel in July, saw Andrien Meyers, head of pensions investments at Sutton and Kingston, facilitate a roundtable session on strategic asset allocation. Meyers acknowledged that it was a broad theme, but said that in a triennial valuation year, “it’s the right time, as most funds in the room are probably halfway through the exercise. Some might even know what their initial results are looking like.”

“Some will have an indication that funding levels are improving – and improving to a point where they are nearly 100% funded. Others may need more, but are definitely on the right path.”

Should funds stick or twist on risk?
The first theme to be addressed was whether funds will be looking to derisk. “If they’re not, what else might they be looking to do?” asked Meyers.

Table 3 was asked to share their views on derisking and said that in a word, the answer was no, funds would not be derisking. That the funding level is improved is great news, but the funds are still open and there are still a lot of moving parts.

“The big monster is inflation and the impact that has on cash flows,” said the table’s representative, “and what funds should be focused on is making sure the assets keep up with the liabilities over the long term.”

“As we move through this valuation cycle, we need to be keeping an eye on the fact that the liabilities will be going up,” he said.

“We need to keep our foot on the gas. However, the enthusiasm we have seen for moving away from equities has calmed, but we may see increased funding of alternatives come from the fixed income portfolio.”

All for one and one, two,…eight for all?
The next theme Meyers presented concerned the government’s pooling guidance. Though consultation has been anticipated for three years, he said that something may come out later this year.

“However, something’s changed since 2019,” said Meyers, “Following the Palestinian ruling in 2020¹, if the government wants to mandate pooling, it can’t do that through guidance, but must be through legislation.”

“And, if the government mandates us to do pooling via primary legislation, is there a chance for the current seven or eight pools we have to become three or four?” he added.

The table asked to respond with their views said they felt the spirit of what had come from Theresa Clay was that a voluntary process remains the preference, and that primary legislation wouldn’t be forthcoming from central government.

It was felt that because pooling had begun, and because of the fully funded nature of much of the LGPS, this would remove the sense of urgency for central government. Also, given the current state of the economy, it’s not likely to get top billing on any agenda.

“We feel that part of levelling up pointed more towards preferring local structures, and having strategic allocations dealt with at a local level,” said the table’s representative. “We also wondered whether there were further fee savings to be gained from a super pool if we’re moving more to the idea of there being a limited number of pools. We also considered that to satisfy each client, such a pool would need an enormous menu of options, that would require resource and could undermine the benefits of having a super pool.”

We’re on a road to no carbon
Meyer’s third theme was the LGPS’s journey to net zero. He acknowledged that both funds he represents as an officer do not have a target date and that within the 32 London boroughs and the City of London, there are a host of different targets and ambitions.

“But if we are to take net zero seriously,” asked Meyers, “should the LGPS have one target date, as opposed to all funds working to different target dates?

“And should the pools all align their net zero dates and their offerings to the date of these funds?”

The table dealing with net zero agreed that a standard target for all funds – for instance, 2050 – would be very sensible.

“That’s not a bad start, thinking of one target across the LGPS,” said the table’s representative. “It’s simple, coordinated and very easy to communicate to external stakeholders about how the sector is addressing this challenge.”

It was also accepted that while a standardised message is positive, coordination is extremely difficult, particularly when political influence – and differing views about implementation – are factored in.

“There’s a danger that by arriving at a single number, you reduce the project to the lowest common denominator, which may well lack the ambition that certain parts of the sector wish to demonstrate,” the rep said.

Ensuring there’s some commonality across a pool would also simplify the investment challenge, with no need for ever more granular investment solutions.

“We must think about this in the context of asset allocation and the funds’ different funding levels, different net zero pathways for different asset classes, and particularly as data comes through in different ways,” said the table rep.

“If you need a different asset allocation and a different return, it’s very difficult to coordinate, as you can’t promise that carbon is going to reduce at exactly the same rate across every asset class effectively.”

Levelling up or LGPS picking up the tab?
The final topic was the government’s levelling up agenda. The white paper issued earlier this year, had a few lines mentioning the requirement for LGPS funds to have a plan in place for levelling up.

It’s a niche area for levelling up within the UK said Meyers, with local defined as within the UK, so should we have one pool that does levelling up on behalf of all the LGPS, or should individual funds be allowed to go outside their pools to find opportunities?

“This is certainly something that has me scratching my head in the discussions with the pool I’m affiliated with,” admitted Meyers.

According to the table chosen to discuss the topic, one of the key discussion points was getting a definition of what the government means by levelling up, beyond a UK-wide investment. “It means very different things to very different funds,” said the table rep.

“Next we considered what, exactly, are the investable opportunities? We know that housing and infrastructure are in the mix, but just how local is local?”

“At the end of the day, we still have to pay pensions,” said the table representative, “but the topic of conflicts of interest must remain foremost in the consideration. Politicians would like to see investments in their own backyards. But that doesn’t always deliver the investment returns, although it does potentially deliver quite a lot of social impact.”

“Smaller scale investments have their own problems, as they still require a great deal of resource and due diligence because of the risks involved. With the exception of some of the larger funds, most simply aren’t resourced to do that level of local due diligence.”

The discussion at the table observed that: whether pools should seek to do this, or even dedicate a single pool to levelling up, would require dedicated regional resource. But why would funds seek that when there are other options doing that already, such as the British Business Bank and the UK Infrastructure Bank?

In the old PFI days, some fairly significant local investment was delivered to build schools and hospitals.

“We think pension funds would be happy to participate in levelling up,” said the table representative, “if they can find the right opportunities with the right level of return.”

1. On 29 April 2020 the Supreme Court determined that the ban on Local Government Pension Schemes disinvesting contrary to the interests of foreign nations and UK defence industries was unlawful as it had been made for an improper purpose.