Agenda item

·         Investment Pooling and Collaboration

5b.1     This item was introduced by Ola Owolabi (OO)

5b.2     MiFID OO told members that the recently issued Markets in Financial Instruments Directive (MiFID) may impact upon the LGPS. Currently local government pension funds are classified as ‘professional clients’ of investment managers, essentially meaning that they are assumed to have a sophisticated understanding of investment risks. MiFID will change this default classification to that of ‘retail clients’ which will mean that investment managers will not be able to assume that clients are able to understand all aspects of investment risk, and will consequently be restricted in the types of investment opportunity they can offer. This may make the LGPS market less attractive to fund managers. However, it seems that schemes can elect to assume professional client status, so the impact may in fact be limited.

5b.3     Employers’ Forum MK outlined plans for this year’s Employers’ Forum. It is hoped to attract as many employers as possible. In past years attendance has been good, with at least 40 employer representatives attending. The Pension Board will have a greater input into planning future forums, but timings have meant that this year’s event has been modelled on past practice.

5b.4     Pooling Investments OO explained the current understanding of Government plans to require LGPS funds to work more closely together. It appears that the Government will not seek fund mergers, and will not mandate only passive investment. However, it seems likely that local decisions will be permitted in terms of asset class allocation, but not in terms of choosing fund managers. Pooling of investments will be required, and there will be a push to increase LGPS investment in UK infrastructure.

5b.5     It is still unclear what infrastructure investment is intended to mean, or how investment in infrastructure projects will produce short term returns equivalent to investing in equities etc. Given that lower LGPS returns are likely to trigger increasing employer contributions, it is unlikely that employers will be content with a scheme that requires investment in low returning infrastructure projects in preference to investments which offer higher rates of return. It seems unfair for employers to retain liability for the LGPS but to be deprived of the ability to make investment choices. MK noted that the Government may be open to local authority ideas on increasing investment in UK infrastructure.

5b.6     It seems unlikely that there will be formal consultation on the Government’s plans at this point, although there presumably will be consultation should there be a move to change pension regulations – for example to allow funds to invest heavily in a single sector (e.g. infrastructure) where the current regulations insist that investment is diversified in order to manage risk.

5b.7     The Government’s intentions in relation to pooling are also unclear. There are a number of pooling schemes already operating, but with the possible exceptions of the schemes operated by London councils and by Welsh authorities, it seems unlikely that any of these schemes would be granted the status of regional pooled funds – unless they attract far more buy-in than any of them have currently achieved.

5b.8     The timescale for pooling is three years, although some elements of the plans (e.g. around infrastructure investment) are likely to take much longer. In any case, the timescales for schemes to divest assets can be very lengthy, and establishing complex joint governance arrangements is very time-consuming.

5b.9     SM commented that this seems like a massive upheaval, particularly given how well the current system operates. MK noted that local authorities had been assiduous in making this point to Government.

5b.10   BR commented that infrastructure investment has been looked at before at a local level, but that it proved impossible to reconcile it with the fiduciary duty to maximise investment returns. The Chair agreed, noting that London councils had previously explored LGPS funding for housing investment, but had not been able to make a case for it.