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Former pension fund director voices concerns over asset pooling

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The former director of the West Midlands Pension Fund has highlighted problems with government proposals to force council pension funds to pool their assets.

Brian Bailey, who ran the £9.8bn fund for 24 years and retired in 2012, said that the government’s proposal to require Local Government Pension Scheme (LGPS) funds to merge unless they met efficiency targets, will affect individual funds’ freedom over how they invest.

The government said that it would consult on the efficiency targets and the exact type of asset pooling in autumn this year.

Writing exclusively for LGC, Mr Bailey (pictured), now the non-executive chairman of Pensions & Investment Research Consultants (Pirc), said LGPS funds invest in more different types of assets than is widely believed.

He said that although State Street Global Advisors research says the LGPS invests in 26 categories of asset, it does not take into account whether those assets are actively or passively managed, and once this is considered, the scheme actually invests in more than 50 different types of assets.

Forcing funds to invest in pools containing a limited number of asset types would undermine their local sovereignty and prevent authorities from pursuing investment strategies most appropriate for them, Mr Bailey warned.

“If funds are to continue to be given freedom to determine asset allocation locally, there is a conflict with only having a small number of asset pools to use,” he said.

“There will be… restrictions on a fund implementing its asset allocation strategies compared with the current position.”

Mr Bailey also raised concerns about how individual LGPS funds would manage their own investments’ performance within a pooled vehicle.

“Does each LGPS fund in the pool carry out its own management as at present, or is it done for them by a third party, or a selected group of funds on behalf of all funds? The arrangements must ensure funds can discharge their statutory responsibilities adequately in terms of managing their investments,” he said.

Mr Bailey said that if the government allows “sub-pools” within the general investment vehicles, individual funds may achieve a greater choice over how they invest.

“If sub-pools were permitted, it may be feasible to allow greater choice with funds selecting differing proportions of sub pools.

“Asset allocations will never the less become more uniform,” he said.

The government has promoted pooling assets as a cheaper way for LGPS funds to invest in high-return assets such as infrastructure, but Mr Bailey said funds might not be able to pool assets of this kind if they already hold them.

“Liquid quoted assets are relatively easy to pool e.g. equities and bonds. This represents around 80% of assets.

“For some assets it is possible to establish pools for new investments such as property, hedge funds or private equity, but such assets currently held are not easily pooled, not least because of valuation issues and committed future payments,” said Mr Bailey.

“A practical option would be to exclude certain assets and control the position with a discretionary percentage for funds, say 10 or 15% of assets, to be excluded from compulsory pooling. Another option is to have new money only in these investments being pooled,” he suggested.

The Department for Communities & Local Government declined to give a response to Mr Bailey’s comments.

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