You were right, Mrs McKenzie
12 Feb 2019
Maths was always the preferred subject at school. English was never a highlight for me, despite my teacher, Mrs McKenzie, telling me that words, and how they are used, were what really matters. Mrs McKenzie’s words were echoing in my ears when reading the MHCLG’s draft Statutory guidance on asset pooling (which is open for 12 weeks - closing on 28 March), most notably the use of the words, “must”, “should” and “may”, which appear 4, 37 and 27 times respectively, and give an indication of the extent to which Funds should adhere to the MHCLG’s guidance.
Ok, we start with the big boys first. The “musts” include:
- A reminder that assets need to be pooled.
- A pool company or companies being appointed to implement investment strategies (the guidance includes a statement that it is for the pool company to decide which managers are used for pool vehicles).
- The pool company being regulated by the Financial Conduct Authority (FCA).
- A governance body being established and maintained to set the direction of the pool and to “hold the pool company to account”.
These represent a strengthening of the positioning, most notably the FCA stipulation. The use of the phrase, “hold the pool to account” is interesting (and potentially provocative). We support the need for oversight of the Pool Company, which is effectively an investment manager for its member Funds, but we believe better outcomes will be achieved if the Funds/Pool relationship works as a partnership that is happy to challenge each other, with clear lines of reporting in place, rather than a “them” and “us” relationship.
There are too many to pick up in this piece. Notable requirements are that pool members should:
- (Working with the pool company) regularly review the balance between active and passive management.
- Take a long term view of pooling implementation and costs, taking account of the benefits across the pool and should not seek simply to minimise costs in the short term.
- (From 2020) only make new investments outside the pool in very limited circumstances.
- (Through their pool governance bodies and involving the pool company) decide the pool’s policy on which aspects of asset allocation are “strategic” (and remain an administering authority decision), and which are “tactical” (and to be undertaken by the pool company).
- Transition existing assets into the pool as quickly and cost effectively as possible, with the transition of listed assets expected to take place over a relatively short period.
It was surprising to see the active/passive topic raise its head again and especially surprising that the consultation says discussions are to include the pool, rather than Funds determine their own position. The focus on benefits across the pool and the scheme as a whole is sure to cause debate, especially given this seems potentially at odds with each Administering Authority being responsible for its own Fund’s funding strategy and potentially at odds with local fiduciary responsibilities. The reference to strategic and tactical decisions is also worthy of comment. Committees are responsible for a range of decisions, many of which we would not define as either strategic or tactical e.g. regional equity allocation, choice of benchmark, mandate outperformance target etc. It will be for Funds and Pools to determine where such decisions sit.
Again, too many to pick up here in this blog, but some notable “mays” include:
- Assets being retained, in exceptional cases, outside the pool e.g. closed ended funds, life funds and direct property.
- (Pool members) Invest through pool vehicles in a pool other than their own.
- (Pool companies) Provide pool vehicles for investment in existing (brownfield) or new (greenfield) infrastructure (with infrastructure including housing)
- (Pool members) Invest a small proportion of assets in local initiatives or in products tailored to particular liabilities specific to that pool member.
- Calling upon members of Local Pension Boards as potential observers on pool governance bodies.
The “mays” are likely to form a notable part of Committee’s discussions and consultation responses. In particular, the potential for some form of cross pool investment (and how this will work in reality) is an interesting element of the consultation. There is also potentially going to be a range of views as to when it is appropriate to hold assets outside the pool (most notably on life funds, with many Funds having already benefited from considerable fee savings, including the LGPS passive framework).
So there you have it. Three words, “Must”, “Should” and “May” which are making a big difference to the LGPS. Over the next few weeks we encourage you to consider how the consultation impacts you, your plans for transitioning into the pool and what reporting you will need from both the Pool and your legacy assets in a post pooling world.