At the start of this year the Ministry of Housing, Communities & Local Government issued detailed draft statutory guidance on asset pooling. Included in the guidance are important provisions that should help the implementation of asset pooling.
The guidance includes definitions relating to asset pooling that are vital in clarifying the requirements and expectations of the ministry. On the transition of assets, it is made clear that individual Local Government Pension Scheme (LGPS) funds must implement asset pooling, removing discretion for them to unduly delay pooling most of their assets.
The sharing of transition costs using inter-authority payments is expressly permitted – a helpful measure. Meanwhile the section on making new investments outside pools seeks to clarify, and in effect minimise, the ability of individual funds to procure asset management services for themselves.
But there are also areas where the draft guidance appears unnecessarily prescriptive or incomplete.
For example, the section on structure introduces a requirement for each pool to have an overarching pool company regulated by the Financial Conduct Authority (FCA). Such a structure does not guarantee that a pool will be effectively run or that its individual funds will genuinely embrace all the potential benefits of pooling.
Seven asset pools have set up or used an overarching FCA-regulated company. But Northern LGPS, consisting of the Greater Manchester, Merseyside and West Yorkshire funds, has not yet done so. The pool participants made a clear, cogent case that, due to their scale and low costs, such an arrangement is not cost effective – though this will be regularly reviewed.
Northern LGPS has also established its own private equity vehicle, and in partnership with the Local Pensions Partnership pool it is the most advanced of the pools regarding infrastructure, working through the FCA-regulated GLIL vehicle. Given these facts the ministry appears to be unnecessarily imposing a one-size-fitsall approach to pool structures.
Similarly, the draft guidance contains an instruction for the regular review of the balance of passive and active investment. This is surely an excessive level of intervention and direction in the activities of administering authorities and their pools.
More encouragingly, the section on governance includes the instruction that pool members “must establish and maintain a pool governance body in order to set the direction of the pool and to hold the pool company to account”.
This section specifies that the pool governance body is ultimately – though in consultation with the pool – responsible for deciding which aspects of asset allocation are strategic and should remain with the administering authority, and which are tactical and to be undertaken by the pool. This confirms that asset pools, which exist only to serve their constituent funds, should not seek to set the framework within which they interact with them.
The governance section of the guidance is also clear that investment strategy and strategic asset allocation remain the responsibility of the individual funds.
Given this clarity one potentially major issue that the draft statutory guidance is silent on is the provision of ‘proper advice’ that individual funds must take in formulating their investment strategy statement. If asset pools were to provide proper advice to their constituent funds the pools would have a potentially decisive influence over the strategic asset allocations of the organisations they have been created to serve.
This would be the tail wagging the dog. In my view it is logical that a statement should be included in the final version of the statutory guidance that asset pools mustn’t provide proper advice to any administering authority.
To end on a peculiar omission, in the draft guidance it does not state that employee representatives should be included in the membership of pool governance bodies. If the governance body is to be fully effective it should be diverse in terms of experience and perspective, leading to diversity of thought and the avoidance of groupthink.
This gap is more surprising given the LGPS Regulations 2013 require employee representatives be included in the governance arrangements of funds through their representation on local pension boards, as well as the 2018 statement by the Scheme Advisory Board encouraging direct representation of employees on pool oversight structures.
This is a fault that should be fixed.
John Raisin, independent chair, Merseyside Pension fund, and independent adviser