Returns, risk and affordability – are you achieving the right balance?
19 Dec 2017 - Estimated reading time: 5 minutes
As the LGPS continues to evolve and adapt to the ever changing pensions environment, it’s more important than ever that Funds manage risks effectively while meeting their long-term funding and investment objectives. Last week, we held our LGPS seminar in London where we explored this in more detail and also considered what impact longevity and the rise of AI could have on the LGPS workforce. Here, we provide a brief summary of each session:
The future of the LGPS
Barry’s opening session considered the developments in Artificial Intelligence (AI) in recent years and the implications for the workforce in local government and in general. The growth of AI and machine learning is expected to be exponential in the next few decades and this could lead to a large number of jobs being automated and potentially a large increase in unemployment unless new jobs are created. It is therefore crucial that any change is managed to ensure the quality of our lives is enhanced rather than reduced through this next potential revolution. This leads us to ask lots of questions about future growth in the economy, the impact on state pension and whether pensions would still be needed or whether a universal basic income would be the “new” pension if we all had more free time.
This led on to how longevity could be impacted by AI and whether machines could learn how to spot patterns quicker than humans, allowing earlier diagnoses and increasing life expectancy through natural progression, or more radically, help develop cures for existing causes of mortality.
Funding & Investment Update
David kicked off his session with a funding and investment update. He outlined the strong position that the LGPS was in as a whole and the impact of recent market movements which had resulted in funding improvements for many Funds. This highlighted the importance of understanding investment objectives which help determine what action Funds should be considering if they do find themselves in a stronger funding position, balancing the “funding fulcrum” of affordable contributions and appropriate levels of investment risk. David discussed a range of options, from retaining current risk return levels, diversifying into shorter or longer term income sources or looking to protect funding positions through lower risk assets or equity protection strategies. Overall, he highlighted the importance of getting the right balance of growth, income and protection that best met the objectives of each Fund.
Simon Jones then discussed an area of rising importance to many Funds which is to determine what their approach should be on responsible investment issues. Simon discussed some of the challenges caused by variations in terminology and the ways in which Environmental, Social and Governance (ESG) considerations can be incorporated in investment processes. This highlighted the importance of monitoring and reporting on ESG issues including tools like carbon footprinting to understand each Funds current position but also the extent to which managers are engaging with companies on these issues on behalf of asset owners. Simon discussed the many flavours of responsible investment which can drive strategy as well as implementation, the extent to which this might be impacted by investment pooling and how each Fund is on their own journey to develop their own policy for responsible investment.
Employer Investment Strategies
Catherine looked at how the employers in LGPS Funds are increasingly diverse, with different funding levels, maturity and cashflow positions. With such diversity it’s very difficult for a single investment strategy to successfully support all employers in the Fund. Catherine went on to explain how Funds can use Hyman’s Employer Asset Tracking system (HEAT) to implement several investment strategies using the same underlying assets. We then looked at a process for grouping employers and allocating them to an appropriate strategy using the experiences of Funds which have already completed this process as a case study. This session finished with a discussion of the governance and administration issues raised by employer investment strategy projects.
The Practicalities of Pooling
The three J’s, Josh, James and John, discussed some of the issues and opportunities that are arising as a result of the current pooling processes. Josh first described some of the considerations in mapping across existing investment strategies to the new pools. He first outlined the importance of Funds being able to retain existing strategies that are aligned to their investment beliefs and objectives. He then discussed the different types of mapping opportunities, from the easy mappings, the compromises and the harder to solve. Josh discussed examples across the spectrum of growth, income and protection assets where there was potential for quick wins and areas of potential compromise.
James then focussed on the transition of assets into the new pools and the potential risks and costs that might be incurred when doing so. He demonstrated the ways in which costs can be incurred but also how transition managers work to reduce or minimise these costs. James outlined the different types of transitions and the importance of planning and using a manager that would achieve the best outcome for a particular transition. He also discussed the options for Funds transitioning outside or inside pools and the potential benefits of working together to reduce or avoid higher transition costs. He concluded on the importance of being able to measure, monitor and report on costs to ensure pooling can be done efficiently.
John’s final session considered the ongoing monitoring and governance of the pools themselves, reflecting on the knowledge and experience Hymans Robertson has gained through Fiduciary oversight services for private sector schemes. John discussed how roles and responsibilities of LGPS stakeholders will change under pooling and the different ways that the performance and governance capabilities of the new pools can be assessed.
As the pooling deadline approaches, we will be developing a series of briefing notes. In our first note, we discuss what pooling means for Pension Committees’ responsibilities, what Committees should expect from their pools and what investment decisions they should be making.
If you would like to discuss anything that was covered in the seminar in more detail, please don't hesitate to get in touch.