The government will consult on a new framework for Local Government Pension Scheme pools by the end of the year, as pooling delivers net savings of just £30m to date and key governance questions remain unresolved.

  

The project of local government pension fund pooling has been underway since 2015, when it was first announced by former chancellor George Osborne. The aim of the project was to achieve benefits of scale, to ultimately allow the LGPS to reduce costs, maintain performance, improve its investment management capability and capacity, and invest in infrastructure.   

  

Since then, the 88 local authority funds in England and Wales have formed eight asset pools, gradually transitioning their assets starting with the most common asset classes such as passive equity. The pools are estimated to have transitioned about half of their assets at this point.  
 

MHCLG: Net savings will reach £350m by 2023 

  

The big question for many is how close pools are to recouping their setup costs and delivering savings. Teresa Clay, head of local government pensions at the Ministry of Housing, Communities and Local Government, said that there has been substantial progress in savings, with £300m saved largely thanks to lower fees and custody costs, which she attributed to the greater scale of pools compared with funds. 
 
However, “after setup and running costs, we believe that net savings to date are around £30m”, she said speaking at the Pensions and Lifetime Savings Association’s Local Authority Conference on Tuesday. She said this figure is expected to increase to £350m by 2023.  

  

Clay was keen to stress that savings are only part of the equation. “Savings are very important, and ministers will continue to take a very close interest in those, but we all know performance is where the real prize is,” she argued, applauding the LGPS for its 10-year performance of 7% and improved funding position.  
 
“Pooling should take some of the credit for the strong overall performance of the scheme notwithstanding the dip last year," she said.  

  

While citing the scheme-wide savings and performance figures, Clay identified reporting and data as key challenges for the LGPS, saying that there was “limited comparability” between pools. 

 

The government now wants to push pools to the next level, and will consult on proposals for a strengthened framework by the end of the year. 

 

“The vision at a high level is for the pools to become investment managers which deliver costs and performance which delivers in line with their comparable pools overseas,” Clay said.  

 

While savings are always going to remain a focus, the department now wants “to see the pools moving to steady state and really striving to stand comparison with similar pools elsewhere”, she added.

 

  

The savings made to date appear to vary wildly across the eight pools. The chief executive of the London Pensions Fund Authority, Robert Branagh, said £30m of net savings have been realised, and the £17m in setup costs for the Local Pensions Partnership pool had been recovered, implying that the LGPS-wide net savings are held back by other pools.  

  

Branagh said the fund has finished transitioning its investments to the £20bn pooling company, which has three client funds, of which two are shareholders in the pool.  

  

Having arrived at the end of the asset transition, he said there needs to be a strategic review at that point. Key questions, he said, should be: “What's in it for shareholders? More significant savings on top of those £47m savings we’ve achieved so far? Is it more about value for money? Is it about moving the enterprise on as a business?... We as shareholders are wrestling with what’s in it for us,” he said.  
  

Branagh also pointed to the issue of potential conflicts where individuals wear two hats, one as a shareholder non-executive director of the pool and another for the fund.  

  

The MHCLG's Clay said that while governance structures are well established and there has been “a great deal of development and learning about what works”, some challenges remained around clarifying the rules on clients and shareholders. “Where funds are double hatted, there can arise difficulties,” she said.  

  

Not everyone agrees that the merging of shareholders and clients is a problem, however. Mike O’Donnell, chief executive of the London CIV, which pools the pension assets of the 32 London boroughs, even said the overlap was a useful one. "Although they need to be clear at times whether they’re shareholder or client, the overlap gives coherence,” he said.  

  

After several years of pooling, governance is evidently still a construction site. For the Oxfordshire Pension Fund, one of the funds in the Brunel Pensions Partnership, the relationship between the shareholders and the company “could have gone better”, said head of pensions Sean Collins.  

  

He said this was partly because there appeared to be a conflict, with the pool looking to meet its responsibilities as a Financial Conduct Authority-regulated body more than meeting its responsibility to the shareholders,   

  

“One of the areas we all agreed wasn’t working well was the role of the shareholder NED,” he said, attributing this largely to a lack of resources given to NEDs and to the high expectation on that role, which he said was “unachievable in a 30-day a year contract”. The pool has since created a new role for a chief stakeholder officer to avoid a similar situation. 

  

The composition of the Brunel board has also been amended, with the addition of a new NED, and the funds have established a shareholder forum.  

  

“Shareholders were decision makers but were the one group we didn’t meet on a regular basis,” said Collins, saying there is now also “far more” involvement of shareholders in the annual appraisal process of the chair of Brunel. “We think those changes will address a lot of the governance issues that weren’t working so well,” he added.  

  

The Oxfordshire scheme will have 80-90% of its assets transitioned once the fixed income portfolio is moved to Brunel later this month, but Collins said asset pooling is not just about cost savings.  

  

Funds should also look at the non-financial benefits of pooling, he said, citing the responsible investment agenda, the stewardship code and Task Force on Climate-related Financial Disclosures reporting. 
 
“There is no way we could deliver on these if it wasn’t for the help of Brunel,” he said.  

  

What are the biggest challenges for the LGPS pooling project?