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LGPS investment pools must have firm governance structures

Source: PSE Dec/Jan 17

Neil Sellstrom, treasury and pensions advisor at the Chartered Institute of Public Finance and Accountancy (CIPFA), discusses the need for firm governance structures in Local Government Pensions Scheme (LGPS) investment pooling arrangements.

The pooling of LGPS assets is expected to begin by April 2018, and while full details of how they will operate have yet to be shared, the principles are clear: reduce the costs, share best practice, and maintain overall investment performance. 

As of September this year, there are eight investment pooling arrangements proposed. And although it is unlikely that the operating practices of each will be identical, it is important that firm governance structures are in place before liquid assets are transferred. 

Good governance is a key building block of any successful organisation. And getting it right allows the organisation to concentrate on the things that add value. The new investment pools should have clarity of objectives, independence of action and transparency of operation. 

The fundamental principles of local government governance will continue to apply to the asset pools. As set out in CIPFA’s ‘Delivering Good Governance in Local Government: Framework’, organisations should still ensure they behave with strong ethical values, integrity, openness and comprehensive stakeholder engagement, which will be demonstrated through: 

  • Defining of outcomes in terms of sustainable economic, social and environmental benefits
  • Determining interventions necessary to optimise the achievement of outcomes
  • Developing the entity’s capacity, including its leadership and the individuals within it
  • Managing risk and performance
  • Ensuring accountability through transparency, reporting, and auditing 

Careful balancing of a range of stakeholder interests 

The above principles equally apply to the management of LGPS investment pooling arrangements. But while the pension funds will continue to be separately managed and maintained by each administering authority, the pooling of assets exceeding £200bn will require the careful balancing of interests of a far greater range of stakeholders. 

Consider that each pool will need fund managers and will likely establish or rent their own Financial Conduct Authority regulated operator. This operator will then be overseen by a board or committee of individuals, who will collectively represent all the local authorities participating in the investment pooling arrangement. Adding to this list, there may also be co-opted members or independent observers, such as scheme member representatives, employer representatives, and investment consultants. And then, of course, each local authority will already have in place a structure for its own existing pension fund. 

The complex, multi-stakeholder arrangement of the investment pooling means that the principles of good governance will need to be adapted. It will be important that the various local authorities brought together through an investment pool establish an appropriate and robust mechanism for managing their relationships with each other through their mutual interests – with the mutual interests dependent on the alignment of each local authorities’ strategies and objectives within the investment pooling. 

Establishing this governance should cover all duties and responsibilities, and there must be agreement over what each asset pool aims to achieve. For LGPS, protecting members’ benefits and keeping the cost to taxpayers and employers to a minimum are the key objectives. A strong governance structure will ensure that asset allocation decisions are made effectively and the best fund managers are selected.



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