The London Pensions Fund Authority, set up in 1989, is one of the largest administrators in the UK of the Local Government Pension Scheme (LGPS). It has 73,000 members from this scheme, and includes more than 220 employers. As well as this, the LPFA operates nine agency administration contracts, covering 123,000 scheme members.
It is a stand-alone public body designed to produce an effective pensions administration service. It aims to pay benefits accurately and invest in a way that will keep the fund solvent while keeping contribution rates low and stable, but it also aims to provide quality services at optimum cost, to strengthen its standing through growth in pensions administration and contribution to public debate within the sector, and to strive for social and environmental best practice across activities.
The authority reports to the Mayor of London, submitting a yearly strategy statement setting out aims, objectives and plans for a three-year period. The Authority’s 11-strong board, appointed by the mayor, is responsible for administering the LPFA, and has a fiduciary duty to the fund members to ensure contributions are collected, benefits calculated and paid correctly and that surplus money is properly invested.
It is up to executive management to implement board decisions and manage the LPFA’s affairs. The chief executive is responsible for strategic, long-term development, the director of pensions operations leads the operations of the LPFA in administering its clients’ pension funds and associated activities and the head of finance and investment manages financial processes for the authority and the pension fund.
At the end of March, 112 staff worked across the authority’s three directorates – pensions operations, finance and investment and the chief executive’s office support services.
As advisers, the LPFA uses two independent investment specialists and the fund’s actuary. The independent specialists are Peter Moon, who has been chief investment officer at the Universities Superannuation Scheme since 1992, and David Rough, head of investment with Legal & General from 1989 to 2002. The actuary is Ronnie Bowie, who is Hymans Robertson’s senior partner.
The authority says it is committed to delivering clear, concise and timely communications, and scheme literature has been updated using the ‘your pension’ series which matches new dedicated websites. These provide direct access for employers to input and track casework online. Members, using a PIN, can access their records and pose ‘what if’ calculations.
There is a debate afoot surrounding the LGPS, and LPFA officers have made significant input here. The Office of the Deputy Prime Minister has started discussing their stocktake of the LGPS, and a consultation document looked for views on how to revise the scheme’s benefit structure and encourage membership. A second paper – this time on simplification of the regulatory framework – was issued in October.
Asset liability modelling
The fund is split into two parts with different profiles.
The active sub-fund, with its 56% contributor base can enjoy the benefit of a longer-term asset allocation strategy in relation to its liabilities. The £1.72bn (e2.46bn) of assets are heavily biased towards equities.
The pensioner sub-fund, on the other hand, has extreme liabilities, accounting for 93% pensioners and deferred beneficiaries, so the asset structure is unconventional, constrained as it is by the number of pensioners needing payment now. The liabilities have been ring-fenced by investing around 90% of assets – £1.94bn – in index-linked gilts and bonds.
About 60% of the fund’s asset management is outsourced to three investment managers. In-house, there is a passive index-linked portfolio, administration of investment in property unit trusts, private equity and the private finance initiative, which is in the early stages of investment.
Following an asset liability study, the strategic asset allocation for the two sub-funds has dominated investment considerations during the financial year. The active sub-fund has target equity weightings pared back to 70%, and preparations for investing some 15% in alternative assets are now advanced. The rest remains invested in bonds.
The significant bond bias of the pensioner sub-fund was reaffirmed by the study, with 87% by value invested in index-linked gilts and fixed-interest stock. This is tied to a cushion of passive equities amounting to 13% of sub-fund assets.
The structure of assets in each sub-fund shows there is a consistent risk-based approach to asset allocation, based on its importance in relation to the liability structure. In its risk-based approach to investing assets, LPFA does not refer to median performance measures, but instead looks for predictable, stable and low employer contribution rates — with enviable solvency criteria despite the turmoil in the markets.
At portfolio level, tactical risk is managed by reference to mandate-specific benchmarks for segregated and pooled investment mandates.
More radical risk management solutions found by the authority include the recent diversification into non-correlated assets including property unit trusts, private equity and the more avant-garde UK private finance initiative and public private partnerships.
Highlights and achievements
In the past year, the London Pensions Fund Authority has continued to give its members, employers and agency clients a high-quality and responsive service. Within this approach there have been several major initiatives.
There was a big restructuring of assets and investment management arrangements, with two independent investment advisers appointed. The authority took part in national debate on emerging issues, eg, the LGPS stocktake.
It strengthened partnerships with the London boroughs and developed a programme to secure continuous improvement and quality initiatives involving board members and staff.
Response times have been kept close to 100% despite increasing workloads, and there has been more investment in staff training and technology. The authority’s annual forum for members – which continues to be a great success – was enhanced.
All members have been given secure internet access to make “what if” calculations and view payslips and P60s. A secure online system has been created for employers as well as a generic website for LGPS members.
The number of London borough staff who attend LGPS courses
rose significantly, and the authority’s testing programme has now been accredited by the Oxford, Cambridge & RSA Examining Board.