LGPS asset pooling. John Wright, Nicola Mark 12 January Hymans Robertson LLP is authorised and regulated by the Financial Conduct Authority

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1 LGPS asset pooling John Wright, Nicola Mark 12 January 2016 Hymans Robertson LLP is authorised and regulated by the Financial Conduct Authority

2 The background May 2013 June Sept 2013 Nov Dec 2013 Brandon Lewis at NAPF FT article DCLG / LGA call for evidence Hymans/CEM investment cost benchmarking Hymans Research for DCLG Fund merger seemed likely? Criticism of LGPS inv. costs but bad data Consultation objectives: 1) managing deficits; & 2) investment efficiency First good data on investment costs + international comparisons Compared fund merger with investment pools. Quantified possible cost savings. Analysis of performance. 2

3 The background Jan 2014 Feb 2014 May/July 2014 SAB analysis of CfE responses & letter to minister London Councils give London CIV green light DCLG consultation Themes: -use of asset pooling? -use of passive? -use of in-house? Consider options for managing deficits Collective Investment Vehicle for London Boroughs. Voluntary participation. Forced fund merger ruled out. Instead consulted on asset pooling and greater use of passive Pre-election pause 3

4 Summer Budget 2015 pool investments to significantly reduce costs, while maintaining overall investment performance sufficiently ambitious proposals 4

5 October 5th - Conservative Party Conference we re going to work with councils to create.. half a dozen British wealth funds spread across the country, It will save hundreds of millions in costs, and, crucially, they ll invest billions in the infrastructure of their regions. 5

6 Latest government thinking?

7 Where we are now Fund merger Mandating passive Local decisions on manager choice Increased investment in infrastructure Pooling investments Local decisions on asset allocation 7

8 What government is looking for Pools with significant scale (c 30bn?) Significant savings (hundreds of millions annually?) More investment in (UK) infrastructure Explain how governance will work Expected savings quantified and evidenced Savings able to be monitored A fall back or default for non participants? A clear picture of how various initiatives fit together Proposals must be sufficiently ambitious 8

9 Expected publication - November Statement of criteria for pooling proposals (NOT a consultation) Consultation is happening now informally through discussions Consultation on Investment Regulations: what needs to be liberalised to facilitate CIVs Backstop legislation for funds not participating in pools Potentially a formal response on the last consultation 9

10 Working assumption: criteria for pooling SCALE + simplicity 10

11 Autumn statement: Pooling Criteria & Guidance

12 November 25th Autumn Statement up to 6 British Wealth Funds at least 25 billion of Scheme assets each reduce costs while maintaining overall investment performance wider ambition of matching the infrastructure investment levels of the top global pension funds 12

13 What is happening now? 25 th November 2015 Criteria for pooling published not a consultation Consultation on Investment Regulations: liberalisation to facilitate CIVs Backstop legislation for funds not participating in pools Submit proposals Initial 19 February Detailed 15 July 13

14 Criteria for pooling confirmed SCALE 14

15 Criteria for pooling Criterion Scale Governance Savings & VFM Up to 6 pools, at least 25bn each Accountability between pool and local cllrs Local authority holding pool to account Resources and skills in pool Fees, hidden costs, transparency Benchmark to 2013 and now Estimate savings over next 15 years At least maintain performance Active only where can show delivers value Report performance vs passive Infrastructure Improved capacity and capability to invest State proportion now and ambition 15

16 Criteria more detail (1) Aspect Active Use only where can show delivers value Choosing will need to be at pool level (3.30) managers Where decisions are made Local fund link to pool governance Strategic asset allocation local (bonds & equities?) Pool determines which aspects of asset allocation are taken by pool with VfM proviso (3.28) Maintain clear link between pool and pensions committee eg shareholding exercised by a member of the pensions committee (3.25) Invest in more than one pool allowed? (1.3 A) 16

17 Criteria more detail (2) Aspect Direct property Investing outside pool Don t need to pool existing property (3.19) Pooling for future new allocations Individual funds make case? (2.2) But only existing and prove VfM? (3.16) Illiquid assets 10% of assets, 40% of fees. national would deliver greater scale and efficiency waive 25bn minimum (3.15) Infrastructure aim to invest directly? (3.66) more likely to reduce costs by pooling nationally? scale to buy-in or build up inhouse expertise (3.62) Locally Unclear? (3.12) targeted 17

18 Criteria more detail (3) Aspect ESG In-house management Timing Context policies must enhance ability to manage down deficits and pay pensions when due Guidance will be issued to clarify - policies not contrary to government policy Via pool share best practice, improve capability A pool of internally managed assets could further reduce costs and increase resilience Alternatively, new pools might work with inhouse teams to take advantage of lower costs Structures could be in place in 18 months Liquid assets transfer by 2018 Illiquid likely to take longer 18

19 Back-stop legislation

20 Backstop legislation: Secretary of State power of intervention Evidence that an administering authority Is ignoring information on best practice, e.g. by not responding to advice provide by the scheme advisory board to local pension boards Is not following the investment regulations, e.g. is failing to participate in one of the large asset pools or is proposing a pooling arrangement that does not adhere to the criteria and guidance Is carrying out another pension-related function poorly, such as an unsatisfactory report under section 13(4) of the Public Service Pensions Act 2013 (requires a person appointed by the SoS to report on whether the actuarial valuation of a fund has been carried out in accordance with Scheme regulations, in a way that is consistent with other authorities valuations and so that employee contributions are set to ensure the solvency and long term cost efficiency of the fund.) 20

21 Process of intervention Requiring an AA to develop a new investment strategy statement that follows guidance Directing an AA to invest all or a portion of its assets in a particular way, e.g. through a pooled vehicle Requiring that the investment functions of the AA are exercised by the SoS or his nominee Directing the implementation of the investment strategy of the AA to be undertaken by another body 21

22 Current thinking

23 Where we are now Change is certain Likely outcome regional / likeminded Multi-asset Pools (MAPs) Local funds retain strategic asset allocation responsibility Local funds will hold investment pools to account Govt wants to know what funds will do & who with Project POOL is about the what Each fund will need to consider who will work with Flexibility in guidance helpful You can shape an outcome that meets your needs and government objectives 23

24 Submit proposals to government Deadline INITIAL 19 th Feb FINAL 15 th July What is required Initial proposals Include commitment to pooling Describe progress towards formalising arrangements Individual or joint submissions or both Refined and completed Fully address the criterial set out Information for evaluation of proposal For each pool: Joint proposals Governance, structure, implementation plan For each authority: Individual return Profile of costs and savings Transition profile for your assets Rationale for your assets held outside of the pool in LT 24

25 Findings of Project POOL Preferred approach is Multi-asset Pools (MAPs) formed by regional and/or likeminded groups of funds For most asset types, regional pools may give sufficient size to get majority of scale benefits / fee reductions Regional or likeminded groupings also give individual funds more involvement in governance of pools For infrastructure, a national vehicle may be best (MAPs Plus) Some pools may have choice of in-house and external management effectively a manager choice and same due diligence should apply Report due to be published soon 25

26 Pools are beginning to form London (CIV) South West LPFA/ Lancs Wales Central (Midlands) Northern ACCESS [Central, Eastern & Southern] Border to Coast [Cumbria, Surrey, East Riding] Regional or like-minded groupings Multi-asset pools. Max 6 pools. Min 25bn. 26

27 ACCESS. November statement 1. Officers working to explore the opportunities & challenges of the Govt pooling agenda (whether by this group, others or a combination) in order to be able to inform s101 Cttees 2. Supporting JWG / Project POOL 3. s101 Cttees will require time consider POOL s outcomes before determining next steps ( what before who ) 4. Best outcomes will combine appropriate timescales with effectively managed transition 27

28 Features of ACCESS pool Look highly likely to achieve scale criteria No single dominant fund. Funds range in size but with a small number of exceptions are broadly similar in size (most in the range 2-5bn) Manageable number of funds for participation in governance (expect c9-11 funds) Similarities in investment approach (asset types used) and similarities in managers used (top 12 managers by AUM cover c. 2/3rds of the assets of potential participants) Blank canvas all participating funds in at the beginning and are able to help shape design of the pool 28

29 ACCESS: commonality by managers 16% 14% 12% % of Group assets 10% 8% 6% 4% 2% 0% 2/3rds of assets with 12 managers 29

30 Principles of the ACCESS pool Collaborative Objective, evidence based decisions Simplicity Evolution & Innovation Professionalism, risk management Control and local decision making Cost control Equal voice in governance Equitable cost sharing 30

31 Key Features of ACCESS group of funds (draft) Common features of the group of funds likely to participate include: 1) No single dominant fund. Funds range in size but with a small number of exceptions are broadly similar in size (most in the range 2-5bn) 2) Manageable number of funds for participation in governance (expect c9-11 funds) 3) Similarities in investment approach (asset types used) and similarities in managers used (top 12 managers by AUM cover 2/3rds of the assets of potential participants) 4) Although not a deciding criterion for pooling, the funds are reasonably close geographically which will be helpful for joint working and governance 5) All use external managers (no in-house management functions within the group of funds) 6) Participating funds have until now focused on what is the right approach to pooling before considering who they will work with 7) Blank canvas all participating funds in at the beginning and are able to help shape design of the pool 8) No intention to set up an investment management business 9) Apolitical 31

32 Aims & objectives of ACCESS Pool Mission Statement 1) To provide a range of asset types necessary to enable participating funds to execute their locally decided investment strategies. 2) To enable funds to achieve the benefits of pooling investments while preserving the best aspects of what is currently done locally and the desired level of local decision making and control. 3) To help participating funds to execute their fiduciary responsibilities to LGPS stakeholders, including scheme members and employers, as economically as possible. 32

33 Principles of the ACCESS Pool 1) All participating funds will have an equitable voice in governance. 2) The pool s governance will reflect the participating funds preferences in terms of which decisions are made locally by individual funds. 3) The participating funds will work collaboratively. 4) Decision making will be objective and evidence based. 5) The pool will maintain standards of professionalism and risk management appropriate to the responsibilities of managing one of the biggest pools of pension assets in the UK. 6) The pool will avoid unnecessary complexity in its approach. 7) The pool will evolve its approach to meet the changing needs and objectives of participating funds. 8) The pool will be open to innovation that will enable it to better serve the pool s participants. 9) The pool will be established and run economically, avoiding unnecessary cost. 10) The pool s costs will be shared equitably. 33

34 Next steps ACCESS Project Management appointment Detailed plan to 19 February 2016 Government submission Detailed project plan to enable July submission Find memorandum of understanding between participants Workshop for elected members of all participating funds February/March 34

35 Any questions?

36 Initial data summary 7 January 2016 Hymans Robertson LLP is authorised and regulated by the Financial Conduct Authority

37 ACCESS: commonality by managers 16% 14% 12% % of Group assets 10% 8% 6% 4% 2% 0% 2/3rds of assets with 12 managers 37

38 Asset class split Infrastucture 1% DGF Multi-assets 5% Private equity 3% Other 2% Total property 10% Total fixed income 19% Total equities 60% 38

39 Listed equities only (c 22.7bn) Passive equity manager as % of total passive assets UBS 6% BlackRock 8% SSGA 32% Legal and General 54% 25.0% Largest active equity managers as % of total active assets Active Passive 20.0% 15.0% 10.0% 5.0% 0.0% Baillie Gifford Newton Schroders 39

40 Bonds only (c. 7bn) Passive bond manager split BlackRock 7% SSGA 24% L&G 69% 12% Active bond managers as a % of active bonds 10% Active Passive 8% 6% 4% 2% 0% M&G GSAM Schroder Henderson Baillie G 40

41 Multi-asset DGF c.5% of total assets ( 1.7bn) 12 mandates Pyrford X2 Newton X2 Baillie Gifford X2 Largest LGT ( 383m) 41

42 Property c.10% of total assets ( 3.6bn) At least 1bn direct No managers with multiple direct mandates At least 1bn fund of funds Managers with multiple mandates CBRE Schroders Aviva 42

43 Private equity Harbourvest 30% of group private equity (6 Funds) Hamilton Lane largest individual mandate Other multiple mandates Standard Life Adams Street Pantheon 43

44 Infrastructure Fund of funds exist alongside single fund investments Multiple managers include Partners M&G UBS 44

45 Other Includes Timberland Private Debt Managed futures Cash Currency overlay 45

46 Summary Notable mandate overlap exists, most notably Passive Active listed DGF Fund of funds property and private equity Further data tidying required (most notably fixed income and alternatives) Classification of mandates to consider 46

47 Any questions?

48 Outside the pools presumption that all investments should be made via the pool limited number.might be less suitable, such as local initiatives or produces tailored to specific liabilities prepared to accept that some existing (directly held) property assets might be more effectively managed directly and not through the pool 48

49 Outside the pools Existing closed ended funds? Direct property? Local investment? Cash? Others? 49

50 Any questions?