David Walker: The changing roles and relationships within the LGPS

The pooling of local government pension schemes may involve devolving decision-making to separate bodies. But all parties must remain engaged in the process for the promised efficiencies to be delivered says Hymans Robertson head of LGPS investments David Walker

The structural reforms within the English and Welsh LGPS are now gathering real pace. Detailed submissions to Government were completed last summer and the formative – or in some case established – pools have now received feedback on their submissions and been given either a formal “greenlight” or guidance on the areas to focus on over the coming years. With a target date of April 2018 the timescales to implement a fairly seismic change in the LGPS landscape are short.

In today’s social media focussed world, for many people the communication of our changing “relationship status” has become important. In the new LGPS world the status of existing relationships will have to change in order to adapt to the requirements of the new pooling structures. It is essential that we all understand how these relationships have changed and what it will mean for our everyday interactions. The relevance of the changes will vary for different individuals depending on their current, or new, role under the pooling arrangements. A range of people involved in the LGPS, from elected members and officers to fund managers, consultants and advisers will be impacted by this. For instance, elected members are likely to have less contact with managers and a greater focus on governance and strategy. Officers and managers will have new working relationships with pools and consultants and advisers will see the impact of increasing collaboration within and across pools.

Whatever the differences in the roles, it will be important for everyone involved that strong relationships are both maintained and developed. Nurturing these relationships will ensure that the right investment decisions are made. Implementing these decisions efficiently and cost effectively will ensure the continued success of the LGPS.

One of the key areas of focus within the structural reforms was on improved governance and decision making. It will be a continued responsibility of administering authorities to set the investment strategy of their fund locally in a way that reflects their attitudes to risk and return. The route to implementation under pooling will dictate the extent to which their investment options define how the authorities access the investment markets and the underlying return streams. It is therefore important that, as pools develop, authorities are fully engaged in the pooling process and how the available investment options are defined.

This is highlighted by the requirements of the new Investment Strategy Statements (ISS) which need to be in place by 1 April this year. In the ISS, funds will state their approach to setting the level of investment risk within the fund and how the agreed risk and return objectives are evidenced through the assets in which it is invested. In the new pooling world it will be important for authorities to show the decision making process for setting the fund’s investment strategy and how the underlying investments will deliver their objectives.

The CIPFA and the IFAC have set out a model for good governance, which provides a framework that could be applied to the new pools. (‘International Framework: Good Governance in the Public Sector (CIPFA/IFA 2014). It covers the objectives, principles and policies that should be applied along with implementation, reporting and learning.

The new governance model will also impact on the way decisions are made through delegation of some aspects of decision making powers. It’s therefore vital the right decisions are made to allow funds to get the best possible investment outcomes. Authorities should be clear on the power that they have in being able to shape the investment options in whatever pool they are working with. As clients of the pools it is important that authorities get the services they need from them.

From time to time there will be some new invention that comes along which makes you think, that’s great; how can I get one of those? Within the world of investments there will continue to be new market opportunities that develop and investment products designed to capture these opportunities. The question in the new pooling world is, if it’s a strategic decision to invest in an opportunity, how does that become one of the options available within the pool?

What the government doesn’t want, and which loses the potential benefits of scale, is for authorities to make individual allocations outside of the main body of pool assets. There should be clear processes in place for engaging with other funds on investment ideas. It is imperative to consider and evaluate investment needs and work with pools to develop investment solutions that are not static, but can adapt to the changing market environment and the needs of clients. Funds should consider the governance structures and processes that are put in place to help future proof the pooling structures and allow them to evolve and capture new and emerging investment opportunities.

Timescales are clearly challenging but there is a great opportunity to make decisions now that will to guide the future outcomes of the LGPS.