Strong and cohesive oversight will be even more important as the UK’s Local Government Pension Scheme (LGPS) goes forward, as investment pools bring in new partner funds and develop new capabilities.
Asset pooling for LGPS funds was introduced to reduce inefficiencies and high manager turnover, pointed out Jo Kempton, head of pensions at Lincolnshire County Council, while speaking at the Pensions and Lifetime Savings Association’s (PLSA) local authority conference on Tuesday.
She said that pooling aimed to address these issues by offering stability and scale.
However, she said that as pooling has evolved, so have the challenges. She added that pension funds are “captive investors” and “there’s no getting away from that”, but she stressed that it does not mean that such schemes are “powerless”.
She said: “We are able to make those changes […] if we do our job properly as funds and owners”.
Earlier this year, the government delivered a verdict on LGPS business proposals, with six out of eight investment pools not meeting the government’s new minimum set standards and being told to find a new arrangement.
As part of the proposals that will see a more consolidated LGPS landscape, the UK government is also requiring pools to have internal management capabilities regulated by the Financial Conduct Authority (FCA).
Kempton stressed that oversight here is “key”. She said that fund officers must hold pools accountable, particularly during periods of underperformance.
“We can’t sack the pool […] but we own the pool so we can say ‘no, we need to go back to the start on this investment vehicle completely’,” she noted.
This is where Kempton said pension funds might need external advisors or fiduciary oversight advisors to assist them in asking the right questions to understand the underperformance.
She stressed that this is “key” as underperformance is not necessarily a reason to terminate a manager.
Another crucial element highlighted by Kempton is investment beliefs. She said that there will need to be a “review or reset” of investment beliefs to ensure commonality of language used and ensure the investment beliefs are “implementable”.
“There will be work done as we create the new advisory service in understanding all the various pension funds’ investment beliefs and how we can bring them forward so that people’s beliefs are met, but are also clearly understood within the possibilities on the responsible investment side.”
This is especially important as these beliefs get more diverse going forward, as pools potentially bring in new partner funds and develop new capabilities.
Kempton said: “We don’t want a different solution for every single partner fund because then we will lose all the benefits and economies of scale, but there isn’t going to be one answer. As fund officers, we have the responsibility to work with our committees to ensure they understand our fiduciary duty and what responsible investment means.”
She pointed out that responsible investment in particular remains a misunderstood concept. “Responsible investment is about well-run long-term investment. It’s not climate change.”
She said that while political shifts and councils may influence responsible investment, committees must be reminded of their fiduciary duty. “It is a non-political committee […] personal views shouldn’t be leading the investment decisions,” she concluded.
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