Agenda item

44.1     The Board considered a report providing an update on various governance workstreams completed and changes affecting the LGPS and the ESPF introduced by Sian Kunert (SK) who drew the Committee’s attention to the following:

1)    Following the Mansion House speech of 14 November officers were able to confirm that a consultation was announced on 15 November with significant detail provided.

2)    With regards to the LGPS the Government will legislate to consolidate the LGPS administering Authorities into 8 pools which was expected. Four key documents were provided with the consultation: the investment review interim report, a defined contribution consultation and an LGPS consultation and a paper on investment in the UK economy.

3)    The LGPS consultation covers: reforming the asset pools, strengthening governance and boosting investment in regional areas. There would be a requirement that the LGPS administering authorities fully delegate implementation of investment strategies to the pool and take principle strategic advice from the Pool. All of the Pools would have to be FCA regulated (5 of 8 currently) and the administering authorities would be required to transfer legacy assets to the management of the Pools.

4)    An indicative timeframe to move to that model is by March 2026 which is a very short timeframe particularly for non FCA regulated Pools. ACCESS is not FCA regulated so it would be challenging for them to meet the proposed deadline.

5)    In relation to boosting LGPS regional investment in the UK, the Committee would be required to include a target range of allocations to regional growth plans as part of the investment strategy. The Pool would be responsible for the due diligence of any local investment opportunity but the Committee would decide the target range of the investment. The expectation is that the investment opportunities would be within the Pool’s region and the Committee would have to set out the Fund’s local investment impact within its annual report.

6)    In relation to strengthening governance the information set out was as expected and there are no significant concerns at this time and no material changes would be required as the strategies and policies required are already in place, although a few of these would instead be consolidated into a single policy document. The Fund is in a very good position to respond. An independent two-yearly review would be undertaken to ensure that good governance practices are in place.

7)    The Pool board would be required to include a representative of their shareholders and improve transparency; at present ACCESS is not structured as a standalone built company and does not have a Board.

8)    The deadline to respond to the consultation is 16 January 2025 which is before the next Committee meeting and therefore delegated authority to the Chief Finance Officer to submit a return on the Committee’s behalf is sought.

9)    The asset pools have been asked to work with the administering authority clients to submit a separate proposal for how they will meet the compliance requirements and complete the transfer of legacy assets by March 2026. This response is required by 1 March 2025.

10) Merging pools is encouraged but not a requirement within the consultation however each pool would have to set out why a merger would not be more cost effective and set out the corresponding analysis. There is nothing to suggest at the moment that ESPF would cease to exist in its current form and the existing team structure is not expected to require significant changes.

11) The most significant impact would be on the way the Committee currently works, in that the Committee would only be responsible for agreeing a very high-level strategic asset allocation alongside their Investment objectives and risk parameters. The Committee will no longer be able to decide which managers or available sub-funds to invest in.

12) The Committee will continue with its agreed investment strategy and continue to be active stewards of the Fund through the consultation process and until there is certainty of change of responsibilities through the introduction of statutory guidance or legislation.

13) The consultation documents will be shared with the Committee following the meeting.

14) The consultation acknowledges that savings and efficiencies have been achieved but that non-FCA regulated external companies lack the in-house expertise, capacity and resilience to provide services on a non-profit basis.
 

15) In relation to investment in the UK the consultation does not specify a compulsion to invest a set percentage in UK investments; this may be due to the extent of the research carried out by Government leading into the Pensions review through roundtables and calls for evidence ahead of the consultation which will have highlighted that the LGPS funds have significant exposure to UK investments.

16) Officers advised that there could be potential savings which will be made by the Fund as investment consultancy contracts will be different, the independent advisor role will change and costs relating to investment advice; whilst noting that internal staffing costs are unlikely to be impacted as the work carried out internally relates to the administration governance and financial controls of the Fund, not in implementing investment strategy. Pooling has focused on reducing costs and manager fees have been successfully brought down over the last 8-9 years, so many savings have already been realised. There would be costs involved to form the pools and transfer legacy assets however the returns generated at the end point would be advantageous.

17) Regarding the changes to inheritance tax relating to death grants, officers confirmed that there is a consultation planned which the Fund will respond to. Officers will communicate with members appropriately closer to the time, but this is not expected within the next 12 months. It would require a change in process if it becomes law and the Fund will await details on implementation and requirements. These changes could result in time delays in settling estates and issuing benefits.

18) The Committee noted that not all assets are best pooled and that there are good opportunities within UK investment, but they can be limited in terms of capacity. The Fund’s duty to members will remain so any investments must be in that context, and this could create issues in future. Advisors agreed that due diligence for these investments could be challenging, and the work required often does not match the scale of investment.

44.2     The Committee RESOLVED to:

1)    Note the report; and

2)    Delegate authority to the Chief Finance Officer to submit a return to the Local Governance Pension Scheme consultation on behalf of the Fund in consultation with the Chair of the Pension Committee.