Agenda item

The Committee considered the preferred pool structure for the LGPS Asset Pooling arrangements.

The Chief Financial Officer introduced the report and made the following comments:

·         The Pension Fund's Strategic Asset Allocation currently exceeded the Government's current implied target - 4% level of investment in Infrastructure

·         The Government had provided a strong steer that it believed that the Combined Asset Pool (CAP) would not be a workable approach to pool governance

·         One Fund – one vote remained a key principle of the LGPS Central pool

·         Each pool was required to provide the Government with its proposed structure, an implementation plan and a robust business case by July 2016

·         All cost forecast to be incurred prior to July 2016 with regard to developing the pooling arrangements were within the Chief Financial Officer's delegated spending limits as set by this Committee

·         The first key decision that the Committee would need to make concerned the legal and governance structure for the Pool. Eversheds were recommending a Collective Investment Vehicle option rather than a Combined Asset Pool option. Under the CIV governance arrangements, assets would be held in the Pool and each Pension Fund would be able to buy individual units. The CAP governance structure would involve collective procurement arrangements and although the Pension Fund retained ownership of the assets, it would require FCA registration

·         Officers reconfirmed that theyhad a close working relationship with colleagues in other Pension Funds within the proposed LGPS Central asset pool and therefore it seemed appropriate to join up with this pool of like-minded bodies

·         Officers from the different Pension Funds within the Central Pool had agreed that the CIV was the most appropriate governance structure for the Pool at a fund level or were taking that proposal to their fund governance at the same time we were

·         The Government was considering creating a separate pool to hold infrastructure investments. Other pools would then be allowed to access it. Roger Phillips added that the LGA had queried with the Government how an infrastructure pool would operate  

·         The possible draw backs of entering into a CIV governance structure was that it would be more expensive to operate under FCA regulation, the potential impact on staff, the dilemma as to whether to develop an in-house CIV or buy one "off the shelf", and the need for appropriate procurement arrangement for contracts

·         The benefits of the CAP governance structure was that it would be cheaper to operate, the Pension Fund maintained control of its assets and although there would be limitations over the long term they would not be as great as under a CIV governance structure

·         The Government had indicated that as a minimum it would wish to see a single entity at the heart of any proposals for pooled assets

·         Deloitte, supported by Eversheds had been employed to look at the options for buying or buying, renting or developing LGPS Central's own CIV. A business case was being developed and a number of workshops would be set up

·         A meeting of Section 151 officers had been arranged together with Pension Committee Chairmen. It was anticipated that a draft business case would be determined by 16 May with the final version completed by mid-June.

In the ensuing debate, the following principal points were raised:

·         The proposals for the asset pooling appeared to focus more on reducing costs rather than improving investment performance. The Chief Financial Officer indicated that one of the four criteria for establishing an asset pool was excellent value for money and it was anticipated that the pool would improve investment performance and at the very least maintain existing performance

·         What approach would be taken by the asset pool towards investment management? The Chief Financial Officer explained that the procurement of investment managers was a matter for the Pool to determine and develop an implementation plan accordingly. Worcestershire Pension Fund's role would be to set the strategic asset allocation. It was the Pool's responsibility to achieve improved investment performance. It was therefore important to have the appropriate governance arrangements in place

·         In response to a query, Roger Phillips stated that the Government's level of commitment to asset pooling had not changed. They still had the same fiduciary duty to ensure sound investment

·         Did the other Pension Funds within the Central Pool have a similar approach to investment management? The Chief Financial Officer indicated that it was not possible to confirm at this stage but more information should be available for the next meeting of the Committee 

·         Concern was expressed that the proposed arrangements for an infrastructure pool could lead to deals being done behind closed doors. In response it was commented that the argument for the creation of such a pool was to create economies of scale and maintain or improve transparency

·         Did the decision to buy, build or rent a CIV have implications for staffing arrangements? The Chief Financial Officer advised that renting a CIV could lead to staff transferring to the operator dependent upon the particular structure in the existing CIV. Details of these arrangements will be considered by the Eversheds and Deloitte work

·         What would happen if the Pension Fund decided not to change its current arrangements? The Chief Financial Officer stated that there was may be an argument for retaining the status quo as it may be difficult to improve upon the existing procurement arrangements that had been negotiated on behalf of the Pension Fund. The challenge was to show that in the long term the pooled asset proposals would not only cover its operating costs but show increased savings and improved performance

·         How long did the Pension Fund need to commit to a particular pool and was there flexibility to leave and join another pool if performance was not as desired? The Chief Financial Officer stated that the length of the commitment to the pool would be determined by the business case. However it was important to show a degree of commitment to the pool to avoid putting the pool at risk by destabilising it. In addition, the move to another pool would not guarantee the Pension Fund a role in that Pool's Governance process

·         It was clear that the Government steer and officer advice was that the CIV was the most appropriate governance approach for the Central pool.

  RESOLVED that:

a)    The LGPS Asset Pooling Report be noted; and

b)    The CIV structure (option 1) be approved as the preferred pool structure and the Chief Financial Officer be authorised to support the development of the submission of the Pool to Government on that basis.