By Alison Murray, Principal and Senior Consultant and Jeff Houston, Principal and Senior Pensions Consultant at Barnett Waddingham
Unfortunately, that’s not the case - the sections covering pooling and local investment also contain some significant governance and legislative implications.
This isn’t really surprising as both these areas will require informed and effective decision making – just proving that in the end it really does all come down to governance.
Below, we draw out those implications of the consultation and explore how fund officers could be preparing for them.
Delegations to the pool company
The government will require a number of what it refers to as ‘delegations’ to the pool company - for example implementation of strategy, and optionally strategic asset allocation (SAA). Unless the forthcoming Pension Schemes Bill makes specific provisions for these delegations, they will be outside the scope of the term as used in the Local Government Act 1972. Fund officers may wish to seek internal legal advice on how these should be documented within the policies of the administering authority.
Procurement of pool services
The government intends to legislate to ensure that funds can use the pool company for a full range of services without breaching the vertical exemption in the Procurement Act 2023, even if the pool does work for the benefit of non-shareholder funds. All well and good, but procurement teams will need to be brought up to speed and be on board to avoid any misunderstandings. In addition, someone - possibly the oversight service referred to below - will need to keep any eye on your pool to ensure that no more than 20% of its work is outside the LGPS.
Investment Strategy Statement (ISS) and Strategic Asset Allocation (SAA)
Your pension committee (or equivalent body) will need to shift its focus to the high-level aspects of investment, away from manager selection and other implementation decisions. Considerations around the ISS may well be little changed, but fund decisions on the SAA cannot be more granular than that set out in the standard SAA template if not ‘delegated’ to the pool company. Changes to committee agendas and training will be necessary, but note that long-standing committee members may not welcome this change to their role.
In relation to investment advice, funds will not be prohibited from seeking ‘supplementary’ (investment) advice from sources outside their pool, but this should be in ‘exceptional circumstances’ where there is appropriate justification.
Oversight services
The pool company will provide the vast majority of investment-related services. We fully support the confirmation that funds can procure oversight services to provide reassurance in the pool’s implementation of their strategy. This is common practice for private sector trustees who use fiduciary managers but will be new to the LGPS. The government wants any procurement of such services to be collective rather than fund by fund. Perhaps there is a role for the LGPS framework to set out the scope and fee limits for such work to avoid the ‘mission creep’ which the government appears to be wary of. As an aside, the response also states that legal advice on fiduciary duty (if required) should be sought on behalf of the scheme and points to previous advice sought by LGA.
A new pool?
21 funds have been asked to consider which of the six other pools they want to join and the response suggests only “limited flexibility” on the March 2026 deadline for pooling. Regardless of the probity of this request by the government, those funds would do well to make governance considerations top of their list when assessing their options. Although the objectives of pooling are investment-focused, the means to achieve those outcomes in ways which meet the requirements of the funds will be almost entirely down to how the pool will be governed.
Working with others
The local investment section will require funds and pools to work with a range of other organisations to identify potential local investment opportunities. It will be down to funds and pools to determine how this will work and will require new communication and decision-making structures.
For example, if funds directly work with mayors or combined authorities, will it be officers or elected members who lead the discussions? And will the pension committee or perhaps a specialist sub-committee be where decisions on those opportunities to feed through to the pool are made?
Making local investment work for you
The response makes it clear that funds and pools are responsible for creating a process to decide which local opportunities should go to the pool for further due diligence. Too narrow a process - for example only opportunities of a certain asset type and above a certain value – means there is a danger of funds not seeing any positive outcomes in their area. On the other hand, a process which is too wide means the pool’s resources could become overwhelmed, and opportunities could be missed.
It may be best to start these discussions with your pool now to ensure an effective process is agreed, and in particular how your fund will be part of the selection decisions going forward.
The legislative ‘stick’
The pooling section provides some further details on the potential implications for governance reviews and other legislative powers the government will be taking for itself. While the context is a failure to meet pooling deadlines, the resulting direction to carry out a governance review offers insight into what such a review might lead to. This includes the wind up and forced merger of funds as well as directions to participate in a particular pool. We won’t know the full extent of these powers until a draft bill is published, but it would be prudent to ensure that your committee are fully aware of them.
Single purpose pension authorities
Finally, and on a more positive note, the government has indicated its willingness to work with authorities going through local government reorganisation (LGR) to explore single purpose pensions authorities as a potential new home for funds displaced by the process. Funds going through LGR may want to consider this as a possibility. We have already discussed the advantages and downsides of this option with a number of clients and would be happy to extend those discussions with others.
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