LGPS CENTRAL POOL CHAIRS, VICE-CHAIRS & SECTION 151 OFFICERS MEETING. 24 May 2016

Transcription

1 LGPS CENTRAL POOL CHAIRS, VICE-CHAIRS & SECTION 151 OFFICERS MEETING 24 May 2016

2 AGENDA UPDATE Timeline/decisions made to date Work undertaken BUSINESS CASE Vision Proposals in business case - Scale - Governance - Cost savings - Infrastructure NEXT STEPS Communications Project plan key dates LGPS CENTRAL POOL CHAIRS, VICE-CHAIRS & SECTION 151 OFFICERS MEETING 2

3 LGPS CENTRAL 34bn LGPS CENTRAL POOL CHAIRS, VICE-CHAIRS & SECTION 151 OFFICERS MEETING 3

4 TIMELINE TO DATE November 2015 Investment Reform Criteria and Guidance issued. Backstop Investment Regulation consultation February 2016 Preliminary submission on investment pooling to DCLG Mid-April 2016 Approval of structure by administering authorities Mid July 2015 Chancellor s Summer Budget announced that the Government will work with local government pension scheme administering authorities to significantly reduce investment costs by pooling investments, while maintaining overall investment performance December 2015 Announcement of intention to create LGPS Central April 2016 Procurement of external advisers for legal/tax/ operations advice LGPS CENTRAL POOL CHAIRS, VICE-CHAIRS & SECTION 151 OFFICERS MEETING 4

5 DECISIONS MADE TO DATE PLANNED STRUCTURE Collective investment vehicle (CIV) Shareholders forum Practitioners advisory forum Investment company (FCA registered) ACS (FCA registered) Passive, active: Equities Bonds Property POOL Various options OEIC/PAIFs, unit trusts, limited partnerships, co-investments Private equity Infrastructure Property Life policies Passive LGPS CENTRAL POOL CHAIRS, VICE-CHAIRS & SECTION 151 OFFICERS MEETING 5

6 PLANNED STRUCTURE MEETING GOVERNMENT CRITERIA Factors CIV FCA regulation - Yes, for ACS operator and ACS fund FCA registration requirements Scalable - Skilled persons (approved persons) - Systems and controls - Easy to launch multiple sub funds for various asset classes Lead time for implementation - 2 years Risk - Personal liability for CEO, CIO and COO of operator Internal management - Can be provided across the pool LGPS CENTRAL POOL CHAIRS, VICE-CHAIRS & SECTION 151 OFFICERS MEETING 6

7 WORK UNDERTAKEN Programme director, team and plan in place Meetings - Joint pool fortnightly - Cross pool - DCLG/HMT/FCA/LGA Research - Meetings with London CIV, Eversheds, Squires and PwC - Workshops with Northern Trust, Eversheds and PwC Costs and mandate collation Commissioned work - Advice on business plan/operator options/legal/tax matters procured from Deloitte/Eversheds LGPS CENTRAL POOL CHAIRS, VICE-CHAIRS & SECTION 151 OFFICERS MEETING 7

8 PLANNED STRUCTURE ACS OPERATOR OPTIONS FOR ESTABLISHMENT Three options build, buy or rent Build option is recommended - most cost-effective option in the long-term, although high set-up costs - most flexibility over how the ACS operator is established and managed Buy option limited availability Rent option speedy but more expensive and less flexible in the long term LGPS CENTRAL POOL CHAIRS, VICE-CHAIRS & SECTION 151 OFFICERS MEETING 8

9 VISION To create a regional centre of excellence focussed on meeting the investment requirements of participating funds with 34 billion of assets in total To be a long-term, responsible investor To develop internal investment management capabilities To operate cost-effectively To roll out services to other pension funds, charities and endowments in future LGPS CENTRAL POOL CHAIRS, VICE-CHAIRS & SECTION 151 OFFICERS MEETING 9

10 THE BUSINESS CASE SCALE With 34 billion of assets, scale criterion easily met Government s expectation is for investment pools to have at least 25 billion of assets Very limited exemptions are planned - Transport fund buy-in policy ( 250m) - Cash required by participating funds for operational purposes LGPS CENTRAL POOL CHAIRS, VICE-CHAIRS & SECTION 151 OFFICERS MEETING 10

11 THE BUSINESS CASE GOVERNANCE AND DECISION-MAKING Respective roles Fund Identify local liability profile Focus on strategic asset allocation Manage the relationship pool (client and shareholder) Pool Implement funds strategy Manager selection Value for money Accountability Transparency Strong governance Relationship management What are investment pools taking on? Implementation Manager oversight and monitoring Investment due diligence Portfolio construction Manager hiring and firing Reporting LGPS CENTRAL POOL CHAIRS, VICE-CHAIRS & SECTION 151 OFFICERS MEETING 11

12 THE BUSINESS CASE PLANNED GOVERNANCE STRUCTURE Continued responsibilities: Strategic asset allocation Payment of benefits Liability management Pensions committees Eight elected councillors representing local authority shareholder interest, alongside an independent chair Acts as owners of the ACS operator Shareholders Forum Acts as clients of the ACS operator Practitioners Advisory Forum Eight officers representing each local authority with LGPS and investment experience Investment management company Responsibilities: Internal investment management External manager selection Oversight and performance monitoring Investor reporting/communications LGPS CENTRAL POOL CHAIRS, VICE-CHAIRS & SECTION 151 OFFICERS MEETING 12

13 THE BUSINESS CASE PLANNED GOVERNANCE STRUCTURE Shareholders Forum Practitioners Advisory Forum Act as 'owners' of the operator. Oversees that the operator is run in the interests of shareholders by holding final approval over strategic decisions. Comprised of eight elected councillors representing local authority shareholder interest, alongside an independent chair. Meet formally on a bi-annual basis. Example shareholder powers under the agreement Appoint/remove directors of the company Approve annual business plan Approve annual budget (fee model/ cost base) Approval of executive pay (feeding through the operator's board usually through remuneration sub-committee) Approve share capital changes to meet regulatory capital requirements Approve significant transactions (eg, introduction of new members to the pool) Approval/determination of pool exit terms including notice period/exit treatment. Act as a 'client' of the operator. Provide day-to-day liaison between the local authority pension funds and the operator. Comprised of eight officers representing each local authority with LGPS and investment experience. Meet formally on a quarterly basis. Example client activities Provide guidance and advice to the shareholders forum Provide investment guidance to the operator Review and feedback on investment performance Provide advice to the operator on the strategic investment direction LGPS CENTRAL POOL CHAIRS, VICE-CHAIRS & SECTION 151 OFFICERS MEETING 13

14 THE BUSINESS CASE ACS OPERATOR BOARD COMPOSITION Non-executive chair Experienced chair who may have pensions and governance experience. Overall responsible for all activities, including management, operations and development of the company to support strategic objectives. CEO Non-executive director 1 Experienced investment professional who may have held a senior position within an investment manager, or other similar investment-related firm. Responsible for all operational matters of the firm, and oversees the IT infrastructure, with the head of IT reporting into the COO. May also combine the role of Chief Financial Officer. COO/CFO Non-executive director 2 Experienced professional who may have held a senior position as a risk or operations manager. LGPS CENTRAL POOL CHAIRS, VICE-CHAIRS & SECTION 151 OFFICERS MEETING 14

15 THE BUSINESS CASE ACS OPERATOR GOVERNANCE STRUCTURE ACS Operator Board Comprised of executives and non-executive directors of the company. Meet formally on a quarterly basis to oversee the operator and review and approve items raised to it by management. Executive Committee Board Sub-Committees Comprised of executives of the operator Meets at least monthly to discuss matters relating to the day-to-day operation of the company covering operations, valuations, finance, risk, compliance etc. Summary discussion on a monthly basis of the issues raised in the board sub-committees. May be separated into further committees if needed. Responsibility of the CEO and matters would be reported to the board directly or via The board sub-committees. Investment Committee Sub-committee of the executive committee chaired by the CIO. Monthly meetings or as required. There may be a number of sub-committees of the board covering: Audit Risk and compliance Remuneration and nominations. Members of these committees will be the NEDs with others invited to attend as required. Meet formally on a quarterly basis. LGPS CENTRAL POOL CHAIRS, VICE-CHAIRS & SECTION 151 OFFICERS MEETING 15

16 THE BUSINESS CASE ENVIRONMENTAL, SOCIAL & GOVERNANCE (ESG) ISSUES ESG policies to be addressed in July s submission to the DCLG LGPS Central plans to produce a responsible investment framework for approval by participating funds covering: - voting - engagement with companies - handling stakeholder enquiries - ensuring that ESG considerations are included in the investment process Effective management of financially material ESG risks should support the generation of required returns LGPS CENTRAL POOL CHAIRS, VICE-CHAIRS & SECTION 151 OFFICERS MEETING 16

17 THE BUSINESS CASE Total LGPS assets at 31 st March 2015: 217.2bn Over 47% of assets in pooled investment vehicles (PIVs) Source: LGPS Advisory Board Scheme Annual Report 2015 Asset class Asset type 000s % Fixed interest Fixed interest UK 7,598, Fixed interest overseas 3,156, Index-linked Index-linked UK (where stated) 5,086, Index-linked overseas 872, Equities Equities UK 33,773, Equities overseas 45,886, PIVs 92,666, Property Property PIVs 9,217, Property (direct investment) 5,832, Other 12,418, LGPS INVESTMENT POOLING IS A MILESTONE EVENT LGPS CENTRAL POOL CHAIRS, VICE-CHAIRS & SECTION 151 OFFICERS MEETING 17

18 THE BUSINESS CASE Total LGPS Central assets at 31 st March 2015: 33.8bn Over 46% of assets in pooled investment vehicles (PIVs) Asset class m % Equities 19, Bonds 6, Property 2, Private equity 1, Alternatives 2, Other 1, , PIVs 15, LGPS CENTRAL POOL CHAIRS, VICE-CHAIRS & SECTION 151 OFFICERS MEETING 18

19 THE BUSINESS CASE COST SAVINGS Committed to consistent, transparent cost reporting Detailed analysis - Internal collation of pool costs, mandates, objectives and performance benchmarks - Independent, external, consistent, cost collation Identifying key trends and potential cost savings LGPS CENTRAL POOL CHAIRS, VICE-CHAIRS & SECTION 151 OFFICERS MEETING 19

20 THE BUSINESS CASE DRIVERS OF POTENTIAL SAVINGS Reduce Funds of funds in alternatives Pooled investments Indirect property Active External management Increase Direct funds/co-investments in alternatives Segregated mandates Direct property Passive Internal management LGPS CENTRAL POOL CHAIRS, VICE-CHAIRS & SECTION 151 OFFICERS MEETING 20

21 THE BUSINESS CASE FURTHER AREAS FOR POTENTIAL SAVINGS Cost savings will be secured through economies of scale and mandate rationalisation - over 200 mandates/pooled investments across LGPS Central (1oo in quoted equities) Fee negotiations also deliver savings - recent passive equities mandate tender delivered significant savings for several LGPS Central funds External providers encouraged to participate in the development of a competitive offer to the LGPS Pools LGPS CENTRAL POOL CHAIRS, VICE-CHAIRS & SECTION 151 OFFICERS MEETING 21

22 THE BUSINESS CASE MODEL AND ASSUMPTIONS An integrated bottom-up model AUM and asset allocation as at 31 March 2015 Base case no change in mix of internal vs. external or active vs. passive management Transition of assets into the ACS phased over a four year period Cost savings consolidation of segregated mandates, reduced use of pooled vehicles and fund of funds, switch from indirect to direct property, and more competitive fees for alternatives achieved through increased scale LGPS CENTRAL POOL CHAIRS, VICE-CHAIRS & SECTION 151 OFFICERS MEETING 22

23 THE BUSINESS CASE COSTS Estimated investment costs of 166m (50bp) after operator running costs in 2032/33. Compares with investment costs of 196m (58bp) in 2014/15, representing an annual cost saving of 30m (base case scenario) Estimated set-up costs of 3m to 4m and annual operator running costs of around 5.2m Transition costs will be significant - estimated one-off transition costs of 38m to 45m More use of internal management from 2023 could increase the annual cost saving to 52m by 2032/33. This would see internally managed AUM rise from 20% to 38% (scenario 2) LGPS CENTRAL POOL CHAIRS, VICE-CHAIRS & SECTION 151 OFFICERS MEETING 23

24 THE BUSINESS CASE LGPS CENTRAL POOL CHAIRS, VICE-CHAIRS & SECTION 151 OFFICERS MEETING 24

25 PROPOSALS IN BUSINESS CASE INFRASTRUCTURE Government is encouraging LGPS funds to invest more in infrastructure The strategic decision to allocate will rest with administering authorities Implementation will rest with new investment pools, including LGPS Central Definition of infrastructure under consideration LGPS CENTRAL POOL CHAIRS, VICE-CHAIRS & SECTION 151 OFFICERS MEETING 25

26 PROPOSALS IN BUSINESS CASE INFRASTRUCTURE (2) National infrastructure platform options being explored by LGPS. Designed to enable access to suitable opportunities in the UK National infrastructure platform should also lead to lower costs/fees and better diversification/spread Weighted target allocation for infrastructure for LGPS Central funds is 4%, with 1.5% actually invested LGPS CENTRAL POOL CHAIRS, VICE-CHAIRS & SECTION 151 OFFICERS MEETING 26

27 NEXT STEPS COMMUNICATION Highlight reports Conference calls Joint meetings of Chairs, Vice-Chairs and S151 Officers S151 officers Individual pensions committees Reports Pool officers Collaboration Workstream leads Workstream reports Programme director Joint meetings of Chairs, Vice-Chairs and S151 Officers Chairs and Vice-Chairs Consultation responses Meetings DCLG/HMT/FCA/LGA/ cross pool meetings LGPS CENTRAL POOL CHAIRS, VICE-CHAIRS & SECTION 151 OFFICERS MEETING 27

28 NEXT STEPS COMMUNICATION (2) Regular briefing notes for Committee members and S151 Officers Weblink to be set up shortly available to Committee members and S151 Officers Dedicated website to be set up in 2018 LGPS CENTRAL POOL CHAIRS, VICE-CHAIRS & SECTION 151 OFFICERS MEETING 28

29 NEXT STEPS PROJECT PLAN KEY DATES June 2016 Pool to agree business case for submission July 2016 Meeting of Chairs, Vice-Chairs and Section 151 Officers Mid By end June 2016 Administering authorities to agree business case for submission July 2016 Submission of detailed business case to DCLG LGPS CENTRAL POOL CHAIRS, VICE-CHAIRS & SECTION 151 OFFICERS MEETING 29

30 NEXT STEPS PROJECT PLAN KEY DATES POST-JULY 2016 April 2017 Appointment of key executives June 2017 Submit application for FCA registration of ACS October 2016 Incorporate operator May 2017 Submit application for FCA registration of operator April 2018 Pool launch; begin transitioning some investments into the pool LGPS CENTRAL POOL CHAIRS, VICE-CHAIRS & SECTION 151 OFFICERS MEETING 30

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