Key Messages from SAB on the DLUHC Consultation on Investment Issues

The Board welcomes this consultation, which gives much needed clarity on the Government’s future intent on investment policy. We will engage fully and positively with the Department, funds and pools to build as broad a consensus as possible on the way forward. Before submitting our detailed response, we thought it would be useful to share some key principles that inform our view and will form the basis of our response.

• On investment pooling we need to start from where we now are and not revisit earlier arguments. The most important question is how we move forward in the best way.
• The picture drawn in the consultation is of a very top-down structure: with the Secretary of State potentially giving directions, pools having ownership of most decisions and individual LGPS funds left with quite residual functions. We believe that perspective needs to be altered to a more collaborative model, where funds are recognised as having a strong and active role in the governance of pools. They should be able to hold pool executives to account and there is an important role for member representatives in that too.
• Where pools have been successful this has been built more on alignment of strategies than of total AUM (something recognised in the research quoted in the consultation). Alignment requires building relationships of trust, which is why governance is key. Good governance requires partner funds to be engaged and intelligent owners of pools and over time to develop relationships of trust with each other and the pool management. That can’t simply be mandated and there is an ongoing role for DLUHC and the Scheme Advisory Board to facilitate that process, not least by actioning the Board’s Good Governance recommendations.
• The Minister needs to seriously consider how the messages in this consultation could negatively affect progress with pooling. If there is a prospect of some pools ceasing to exist in the relatively near future, then that will give many funds occasion to pause transfers and also reconsider their participation in that particular pool. This is precisely the opposite effect to what the Minister is trying to achieve.
• If the number of pools is to reduce, the Minister needs to carefully balance any further marginal gains through increased scale against what may prove a greater cost of disruption (in terms of fees, tax charges and diversion of management attention at both funds and pools). There is no indication in the consultation of how this process is expected to occur nor what the respective roles of government, pools and funds would be.
• We should also recognise that there are potential risks associated with greater size as well: concentration risk and the loss of ability to be nimble and take advantage of smaller opportunities. There are likely to be different “sweet spots” in scale for different asset classes.
• We welcome the desire for increased transparency on outcomes and training of pension committee members. The Board will work with DLUHC to help develop consistent reporting standards and trusts that the Minister will grant us the budget necessary to support this work.
• On Levelling Up , most funds are keen to invest in place-based initiatives where particular projects can be demonstrated to be consistent with the fund’s fiduciary duty and appetite for risk. Some funds have a deep understanding about how their local economy works, which could give them a competitive advantage over other investors. But the key barriers are scale and supply of opportunities: we would like to see a deeper consideration of what can be done collectively to address those.
• Similarly, UK infrastructure projects have to be competitive with other opportunities around the world. We believe that Central Government should take a more active role in this space, eg a clearer and more activist industrial strategy, a comparable offer to support transition to those offered in other jurisdictions (like the significant funding commitments announced by the European Union and the US Government.
• For the private equity target , we feel the increasing attempts by the UK Government to intervene in asset allocation is unhelpful. Asset allocation is the key determinant of success and requires careful consideration of the specific circumstances of the fund and is based on taking expert professional advice from actuaries, investment consultants and others. Statements from Ministers cheerleading particular asset classes, albeit well meant, are not relevant or particularly helpful to that process.
• It would also be helpful to clarify whether this is intended to cover private markets and growth assets more generally. We believe it makes less sense to limit it to private equity, narrowly defined.