Taking the sting out of the tendering process
Tendering for a new investment consultant – or indeed, tendering to fill any soon-to-be-vacant position – using the Official Journal of the European Union (OJEU) can cause the more than 100 local authority pension funds in the UK a lot of pain, according to Nicola Mark, head of the £2bn (€2.4bn) Norfolk Pension Fund.
This is one of the many reasons Norfolk county council agreed to launch a national framework agreement for investment consultants and custodians, collaborating with Cambridgeshire, Northamptonshire, Lincolnshire and Buckinghamshire county councils, as well as the London boroughs of Hackney and Croydon, to agree the parameters of tenders that could, if successful, cut the time local government pension schemes (LGPS) spend on procurement by up to 90% .
The idea of an open or multi-authority tender for pension procurement is not a new one, with similar initiatives previously spearheaded by the Environment Agency for the LGPS in the south west of the country. Croydon and Lothian Pension Fund have similarly been active, with Lothian selecting Hermes Fund Managers to provide voting services for itself and three further Scottish schemes in May this year.
David Crum – formerly CIO at the UK’s largest LGPS, the £11.4bn (€13.6bn) Strathclyde, and now behind 330 Consulting – hails the move towards a national framework as a positive and necessary development to keep service providers “on their toes”.
“One of the problems of the public sector,” he says, “has been the time taken to go out and replace service providers – the average tender takes about nine months – so it’s a long, laborious, technical process and a disincentive to change incumbents.”
Crum says the complexity of arranging frameworks that can account for “every eventuality” could pose a problem if the effort is extended to investment management agreements. But he speculates that more homogeneous asset classes – such as UK commercial property – could soon be subject to similar attempts.
For her part, Mark, a member of the National Association of Pension Funds’ investment council, says the process “cuts out all the pain” of regular tendering procedures by allowing a scheme using its framework to bypass the first eight months of procurement and proceed to the end.
“If that involves a beauty parade, or if they want further clarification, they want to renegotiate in terms of cost, they can do all that,” she says, all the while providing LGPS with “very robust” due diligence process conducted on their behalf and in advance.
Mark is dismissive of those who doubt the national framework’s legality, noting that it is not “rocket science” and that similar joint-procurement exercises are already operating across local government – albeit outside the pensions sector.
“There were lots of people who said you will not be able to do it, that it won’t be legal, but of course it is,” she insists. “We took counsel on a number of things, and we’re very sure it’s a robust framework.”
She says the national framework Norfolk is developing lends itself to support services, with its aim to launch a tender for investment consulting and custodian services shortly.
She remains less sure about its use in investment management, noting that the “fluid” nature of both asset managers and investment options could undermine the framework’s credibility by being outdated.
With the backing of Lord Hutton’s recent report on public sector pension reform – which noted the potential financial savings of co-operation in tendering – Mark is convinced she is in the right by pushing for such a national approach.
She adds that, while the framework would probably be re-tendered every four years, the savings of a single OJEU would make the more regular re-tendering worthwhile.
An earlier version of this article erroneously stated that the Environment Agency was involved in the proxy voting tender, when Lothian administering authority Edinburgh in fact led the award.