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Helping funds get the most from their pools

William Marshall
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It is now less than 10 months until the government’s April 2018 target date for Local Government Pension Scheme pooling. 

Although a considerable amount of hard work has gone into getting the pools to their current status, more will be required as the LGPS moves towards this “new world”. In this article we set out some of the governance aspects that funds should consider as part of their move to asset pooling, including the need for clarity of roles and responsibilities and putting in place suitable performance metrics - all with the objective of ensuring that improved outcomes for both governance and decision making are achieved.

Setting out the roles and responsibilities

Elected members will continue to have responsibility for setting their fund’s investment strategy. They will also be responsible for setting the funds’ policies – on responsible investment, for example – and for monitoring the pool to ensure that delegated responsibilities are being carried out effectively. The pools will be responsible for implementing the funds’ strategic and investment governance-related decisions.

Given pools will be funds’ primary route to accessing capital markets, it is important that funds work closely with pools, influencing the investment options that they will have available to them – for example, the choice of sub funds. This was highlighted by the requirements of the new investment strategy statements (ISS) which needed to be in place by 1 April this year. In the ISS, funds must state their approach to setting the level of investment risk and how the agreed risk and return objectives are evidenced through the assets in which the fund is invested. In the new pooling world, it will be important that authorities can show the decision-making process they went through in setting the investment strategy and how the underlying investments will deliver what is needed to achieve their investment and funding objectives.

Putting in place the metrics

Once there is clarity on who is making investment decisions on behalf of the fund (and what these decisions are), performance metrics can be put in place. These metrics can be broad ranging, looking at all decisions being made in the investment process; however, they typically fall into four main groupings:

  • Strategic decision made by elected members – eg proportion invested in growth assets
  • Structural decisions made by the pool – eg high yield bonds versus loans, manager selection
  • Managers’ decisions – eg performance and attribution
  • Operational aspects – eg currency trades made by the fund’s custodian

Although not directly related to the LGPS, the Pensions Regulator’s March 2017 guidance on pension trustees’ duties included areas that should be considered when delegating responsibilities, including:

  • How performance will be delivered, the cost implications for the scheme, the total costs of the mandate and how you expect the mandate to add value. In this context it will also be useful to understand how past performance has been delivered
  • The potential for conflicts of interest
  • Potential risks and issues associated with the mandate and governance structures, now and in the future
  • Establishing appropriate reporting relationships with suitable oversights in place to effectively monitor the performance of the fiduciary manager and the underlying mandates

These, along with a number of other points raised in the pension regulator’s guidance, are relevant when funds are considering their approach to monitoring their pools.

The nature of any performance ‘dashboard’ will vary from fund to fund, based on the decisions that have been made at a fund level and which ones have been delegated to the pool. And any dashboard should, of course, include metrics other than those related to investment returns to ensure that the pool remains fit for purpose and is operating within its terms of reference.

It is also important that the reporting and broader communication by the pool enables funds to have a clear picture of the underlying investment dynamics and the risks that are being run. This needs to include a transparent approach to reporting and monitoring, especially in the areas in which conflicts of interest may arise.

Time for reflection

In their 2007 report, Best-Practice Investment Management: Lessons for Asset Owners, Clark/Urwin highlighted that ‘learning’ was a key governance attribute of successful pension funds. This learning includes “past decisions being evaluated against actual outcomes so as to calibrate the decision-making process, while allowing appropriately for noise and signal issues”.

This need for reflection will be important for all parties involved in the pooling process. Arrangements should be put in place that enable this reflection to occur – eg funds and pools developing a set of performance indicators which their providers are assessed against and then analysis carried out on what lessons can be learned (both positive and negative) to ensure funds get the most from the world of pooling.

William Marshall, head of LGPS investmetn clients, Hymans Robertson

Column sponsored and supplied by Hymans Robertson

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