Lothian Pension Fund may move its investment staff to an external, wholly owned company to ensure it does not lose employees to rival managers.
The local authority scheme, which earlier this year announced it would be applying to the Financial Conduct Authority (FCA) to formally register its in-house team, said a recent review of its governance arrangements had raised concerns over the fund’s ability to retain staff.
A report by Alastair Maclean, director of corporate governance at the £4.3bn (€5.2bn) scheme, said high turnover was a “recipe for poor outcomes”.
“Not only could significant change prompt an expensive contingency plan, it could jeopardise the strategy,” he said.
Maclean laid out a number of possible avenues for the scheme to pursue, including retaining investment staff as employees of Edinburgh Council under different terms from other council employees, outsourcing all investments or shifting investment staff to an outside company.
The fund currently manages more than 60% of assets in-house, and noted that the option of shifting staff to a special-purpose vehicle owned by the council was the preferred option.
This is being put to the pensions committee for a formal vote today.
The shift to a wholly owned company would involve the drafting of a “formal and transparent” remuneration policy and avoid the risk of pay disputes with other council employees were staff to remain legally employed by the local authority.
Maclean’s report stressed that salaries paid out under the fund’s preferred model would not necessarily be higher, but rather they would allow the special purpose vehicle’s board to consider industry salary benchmarks when agreeing compensation.
It added that if the proposal for a special-purpose vehicle were accepted, it would shift 11 of its staff – including head of investment and pensions services Clare Scott and investment manager Bruce Miller – to the new entity.
As part of a further report, Maclean said there remained a risk the fund could lose staff as the UK economy improved, despite lay-offs by local employer Scottish Widows Investment Partnership.
The fund also said its FCA authorisation had not yet been submitted but that the application would be lodged with the regulator within the next six months.
It said it would initially not apply for authorisation to act as a custodian of assets or operate a collective investment fund, as this would keep the capital requirements for the proposed company to a minimum.
However, the report added that there was “scope to vary the FCA permissions at a later date if required in the future”.
Lothian, which also manages the Lothian Buses Pension Fund and the Scottish Homes Pension Fund, saw returns of 6.8%, 8.9% and 2.1%, respectively, across the three schemes during the 2013-14 financial year.
It currently employs Baillie Gifford and Invesco as managers for its Pacific equity portfolio; UBS Asset Management and Mondrian Investment Partners as emerging market managers; Cantillon, Lazard Asset Management, Harris and Nordea as global equity managers; and AG Bisset as currency hedge provider.
Additionally, Standard Life manages part of its property, while Rogge manages its corporate bond portfolio.