UK pools slam ‘simplistic’ guidance
UK local authority funds have accused the government of imposing higher costs through changes in its stance towards asset pooling.
The Ministry for Housing, Communities and Local Government (MHCLG) published a consultation in January on new guidance for funds within the Local Government Pension Scheme (LGPS) regarding the ongoing asset pooling projects.
LGPS funds in England and Wales have set up eight asset pooling vehicles designed to improve scale and cost efficiencies for the 88 schemes in the local authority system.
With roughly a third of LGPS assets now overseen by the pools, some local councils have expressed “serious concerns regarding the appropriateness” of the latest guidance from central government.
In a letter to local government minister Rishi Sunak, the Northern LGPS – a £45bn (€52.5bn) collaboration between the pension funds for Greater Manchester, Merseyside and West Yorkshire – said there were “many inconsistencies between the LGPS investment regulations and the draft guidance”.
The letter highlighted a shift of stance from the ministry to require all pools to set up an entity directly regulated by the Financial Conduct Authority (FCA), the UK’s main financial regulator.
The Northern LGPS pool opted not to set up an authorised entity, maintaining that to do so would incur additional costs that would outweigh any benefits of pooling assets. So far, it has established an infrastructure vehicle – GLIL – used by Northern’s three member funds along with the three LGPS funds within the Local Pensions Partnership, another pool. GLIL has raised more than £1.8bn so far.
“Based on our research in this area, we estimate that establishing an FCA-regulated company would increase Northern LGPS’s costs by approximately £10m to £15m,” the letter said. The pool initially estimated savings of £28m, but has since said the total could be “substantially higher”.
It said it would expect central government to meet these additional costs as part of a 2018 agreement with the MHCLG not to impose excessive cost increases onto council taxpayers.
LGPS funds in London also criticised the MHCLG’s draft guidance. The £2.4bn Wandsworth Pension Fund, one of 32 LGPS funds in the London CIV pool, hit out at the “simplistic” guidance, which, it said, failed to take into account the diverse nature of individual pension funds.
It also argued that “enforcing too strict an approach will hinder the market and restrict who will be able to tender for any mandates”, including potentially preventing “good quality boutique managers being able to bid due to capacity constraints”.
The £1.5bn Lambeth Pension Fund said the draft guidance “introduces significant risks of consequence falling on council taxpayers” owing to its “dogmatic” demands on LGPS funds.
It highlighted a proposed 5% cap on investments that individual funds would be permitted to make outside of the pool after 2020. As not all funds would be able to invest via pools by this point, given the timescales set out for launching new offerings, the proposed limit was “of no effect” and should be scrapped, Lambeth argued.