Lambeth Pension Fund has set itself out as a key player in LGPS collaboration and innovation.
Through smart engagement with active managers, a unique approach to responsible investment, and a renewed focus on governance, the fund is preparing itself to be in the best possible position for the future structure of the scheme.
Lambeth’s fund asset value has just topped £1bn, up from £951m at its March 2013 valuation, and has, over the last valuation cycle, managed to lift its funding level from 72.5% to 72.6%.
Guy Ware, strategic director of enabling, said the “public sector pensions crisis” often reported in the press is a myth.
“There is no pensions crisis in local government. Our fund is not fully funded but the deficit is manageable,” he said.
This management is where Lambeth has set itself out to excel, because of the intrinsic link between pension fund responsibilities and councils’ ability to deliver to taxpayers.
“We are paying £1m more into the pension fund this year than last, which is less than we thought, and so has less of an impact on our ability to provide services,” said Mr Ware.
The impact of the pension fund on the wider local authority is clearly present in the team’s minds. Andrien Meyers, head of pensions and treasury, said the fund actively works towards supporting Lambeth in its ambition to be a ‘co-operative council’, encouraging local residents and organisations to run non-statutory services themselves.
“Lambeth is the first co-operative borough and we allow co-operative services to join the LGPS. Seven have joined in the last year as admitted bodies and we have around 12 more in the pipeline. New employers must provide an indemnity to back up their contributions in case they go bust, but for co-ops, Lambeth LBC covers this indemnity for the first few years, so we are supporting the co-operative agenda to deliver services using the pension fund,” Mr Meyers said.
Ethical investment is a hot potato in the LGPS world. The Shadow Scheme Advisory Board recently issued guidance to LGPS funds, based on legal advice it had taken, which said that local authority schemes may take into account investments’ ethical impact, as long as this was not at the expense of good returns for beneficiaries.
Some pension funds are toying with disinvesting entirely from certain stocks such as tobacco and arms but Lambeth does not hold with the disinvestment approach.
Cllr Adrian Garden (Lab), who chairs Lambeth’s pensions board, explained: “When I first came on to the panel, I wanted only ethical investments. No tobacco, no armaments. I have learnt since then that to perform our fiduciary duties we can’t just pull out of everything. We concentrate on quizzing investment managers on how they deal with the boards of the companies we are investing in, and new members of our panel will push even harder.”
Andrien Meyers (pictured), treasury and pensions manager, explained that Lambeth is one of the few council pension funds that ranks the funds in which it invests on their ethical credentials as well as on their investment returns, using quarterly data from Mercer. This helps the fund to hold managers to account, he said.
Mr Meyers said that, in an effort to improve the fund’s governance overall, Lambeth has set up a governance working group to ensure it prepares adequately for new governance standards coming in next year.
From April 2015, when the LGPS’ administration and governance will come under The Pensions Regulator’s remit, local authority funds will need to put in place pensions boards similar to private sector funds’ trustee boards. Lambeth has been working on its own board for some time, ahead of the government’s final rules.
Mr Meyers said Lambeth had five councillors on its pensions panel, who vote on the fund’s business, and one ‘co-opted’ member already, but has since elected more representatives, so that there are five co-opted members: one trades union member, two active members of the pension fund, and two pensioner members.
New members add to the pension fund’s training requirements, but Cllr Garden said the fund is already very committed to training, which he says is ‘vital’ and keen to do more.
Mr Ware said the training is delivered through a collaboration involving officers, actuaries and other consultants and fund managers.
To further improve the governance of the fund, Mr Meyers employed Hymans Robertson to conduct a benchmarking exercise of the fund’s governance. The actuarial firm concluded that Lambeth needed to improve the documentary evidence it kept, which the pensions team has been working on.
Lambeth has also made a series of changes to the way in which it approaches its investment strategy. Mr Meyers said Lambeth has moved to an approach in which it sets its investment strategy at the same time as considering its funding strategy and contribution plan, basing all three on a sophisticated modeller which does not leave the pension fund valuation at the mercy of a particular snapshot of gilt prices.
“We were basing our liabilities’ value on gilt prices at a fixed point in time, but pensions are a long-term game. Inflation and interest rates will change, and a 1% fall in yields means a 20% increase in liabilities, so contributions fluctuate every three years,” said Mr Meyers.
“We got our actuary to model 5,000+ scenarios. The modelling showed that in having a strategy of maintaining the future employer contribution rates at 16.8% and fixing past employer contributions at £20m for the next three years, and then increasing or decreasing contributions at a maximum of 1% per annum, there is a higher median funding level over 20 years. It is expected that the fund will reach a funding level of 100% more quickly.
“Taking the stabilisation approach helped to alleviate the short-term budget pressures that the secure, long-term employers are experiencing and it provided greater budgeting certainty for the larger employers in the Fund – so we have achieved more stability and a £9m reduction in expenditure over a three-year period,” he added.
Using this data to form the contribution plan, funding strategy and investment strategy at once has meant that the Lambeth pensions team can start making necessary changes to its strategy earlier on in each three-year valuation cycle, allowing it to reap the benefits of asset allocations early and freeing up time to focus on governance, Mr Meyers said.
Although it is becoming commonplace in the private sector pensions market, few LGPS funds have taken much precaution against two major risks facing maturing local authority schemes: interest rates and inflation.
Mr Meyers said that after careful consideration, Lambeth has decided to buy into a liability-driven investment (LDI) strategy from Insight Investment. It will re-allocate £89m from bonds to an LDI vehicle run by Insight, aiming to achieve 25% coverage of its interest rate and 20% inflation risk. Although the strategy has yet to be finalised, Mr Meyers said he expects it will involve in-built triggers at which points the fund will allocate more to LDI, such as points at which the funding rate improves, or movements in inflation or interest rates.