The investment pooling for the Local Government Pension Scheme in England and Wales is one of the most ambitious reforms we have seen in the UK pensions industry in many years.
With less than a year to go until they must be fully established, BNY Mellon looks at the top three considerations for creating the pools.
1) Risk reduction
The requirement of an Alternative Investment Fund (AIF) to appoint a depositary will provide additional protection to the pools. The depositary has a fiduciary responsibility to protect the investors in that fund and also has a liability to ensure prompt restitution of assets in case of loss. It is essential that joint governance committees select depositaries with sufficient expertise and financial backing to stand behind the new super pools and support them in line with these additional regulatory requirements.
2) Consolidated reporting
A key consideration is the ability of the authorised entity to receive a consolidated view of the assets within the pool across the various legal structures created. There is likely to be a period of time where the pool of assets will be administered by multiple providers ahead of the full establishment of the authorised contractual schemes (ACS) structure. Outside the ACS structure, the authorised entity will also need to consolidate its view of pooled assets, including alternatives. The LGPS should consider whether some element of data warehousing is required or if consolidated reporting will be necessary.
3) Tax transparency
A small number of LGPS pools favoured the ACS as a tax transparent fund structure enabling optimisation of tax treatment for the underlying pension funds. As this concept evolved, the thinking has also changed. The ACS can provide greater tax outcomes for pension investors in foreign equities and bonds than those obtained in an authorised fund structure. However, it has become clear that other alternative asset classes such as property, private equity and debt funds might be better optimised in partnership structures which are outside the ACS.
Stephen Doyle, head of UK institutional relationship development for asset servicing, BNY Mellon
Column sponsored and supplied by BNY Mellon
The views expressed herein are those of the author only and may not reflect the views of BNY Mellon. This does not constitute investment services advice, or any other business or legal advice, and it should not be relied upon as such