Agenda item

The Committee considered a report on the Department for Communities and Local Government (CLG) consultation proposals for structural changes to the Local Government Pension Scheme.

The consultation document proposed a major change in the management of the assets held by individual LGPS.  The Committee expressed concerns that the proposals had the appearance of "nationalising" the assets of the LGPS and setting the overall investment approach at a national level through a requirement to use two or more large pooled vehicles (known as Common Investment Vehicles, or CIVs).  The constitution and accountability mechanisms around the proposals were also unclear.

A particular concern was that the proposals appeared to seek to manage the LGPS in aggregate through a form of one size fits all approach to the investment of fund assets.  Members felt the approach was too simplistic, and ignored the key fact that administering authorities had a fiduciary duty regarding the payment of pension promises, as well as a duty and a responsibility for making decisions in relation to investment strategy in the context not just of asset performance but also of the liabilities of individual funds. These responsibilities had led to individual funds developing their own specific approaches to asset management in order to maximise investment return:

Over the period since 2009 the Lancashire County Pension Fund had been engaged in a strategic move to develop a higher performing investment strategy, which had been made possible by acquiring professional investment skill and undertaking a greater degree of in house management, although not going as far as actually running an in house trading operation (other than for a very small bond portfolio). This had resulted in the Fund being able to move to a strategy of an asset allocation focussed on reducing volatility and which was alive to the characteristics of the fund's liabilities. Liabilities were a critical element within this, as movements in the Fund's liabilities have had the greatest impact on the level of funding.

This approach had enabled the LCPF to invest significant sums in infrastructure projects on favourable terms and to access a range of different forms of investment which helped to achieve the Fund's investment objectives.

It was clear that the change in investment strategy had improved the Fund's performance, and the Fund's developing approach to liability management sought to build on this further.

However, the proposals made by CLG appeared to reflect a paucity of ambition for LGPS as a whole. Rather than seeking to improve investment performance across LGPS to that of the best performers, instead CLG were proposing a lowest common denominator investment strategy. Of greatest concern was the explicit assumption that passive management of listed equities was the most appropriate means of securing an investment return which would enable the Fund to meet its liabilities. Given the importance of this, it was very concerning that the evidence presented by the CLG to support this move appeared to have significant gaps and made assumptions around investment performance without clear evidence to support the conclusions drawn. 

From the consultation paper it appeared that the Fund's investment strategy decisions would be broad asset allocations between two CIV asset pools. This removed the independence of the individual funds which would remain constitutionally independent and responsible for addressing deficits and liabilities, although with little ability to utilise funds' assets in this regard. The Committee noted that there was very little actual information on how the proposals would work in practice. However, there was a clear underlying view that some degree of compulsion would sit behind the move to new arrangements.

The Committee noted that the CLG consultation document asked 5 specific questions and sought evidence based responses. However, given the time available to prepare the report it had not been possible to construct a complete fully evidenced response. Therefore a "heads of terms" for a full response was presented for the Committee's consideration. Members agreed that the Treasurer in consultation with the chair and deputy chair should be authorised to make a submission to CLG based on the points raised in the report and in the "heads of terms" now presented.

Resolved:

i.  That the framework for a response to the Government's consultation on proposals for structural changes to the Local Government Pension Scheme, as set out in the report now presented, be approved.

ii.  That the County Treasurer, as Treasurer to the Fund, be authorised in consultation with the Chair and Deputy Chair to finalise the Fund's detailed evidence based response.