By early next year, the pooling of assets from the 90 local government pensions schemes (LGPS) will have begun into what previous chancellor George Osborne called British Wealth Funds. Full details of how the new funds will operate are yet to be aired, but the principles behind the move are clear – drive down costs and share best practice to maintain overall investment performance.
As of September, eight investment pools have been proposed, which have until April this year to publish their investment strategy statements.
Across the funds, there are likely to be several different structures and operating practices in relation to the investment pooling arrangements, but for each administrating authority, demonstrating strong governance will be crucial. Much of the governance framework will mirror the principles already required for all local government organisations, i.e. acting in the public interest, seeking positive outcomes for service users and other stakeholders.
But, as highlighted in CIPFA’s Investment Pooling Governance Principles guidance, this framework must also fit the new asset pooling arrangement and be considered alongside principles for investment decision-making. The administrating authority must be able to demonstrate robust knowledge of the asset pooling arrangements and identify and manage conflicts of interest. There must also be an overall investment objective, taking account of the scheme’s liabilities, its potential impact on local taxpayers and the appetite for risk of both the administrating authority and the scheme’s employers.
These reforms will bring challenges and opportunities for the LGPS, but any changes to the long-term structure must keep the relationship between the assets and the liabilities firmly in mind.
The funds must not become the investor of last resort for the politically desirable infrastructure schemes the markets do not see as investment grade proposals.
Rob Whiteman is chief executive of the Chartered Institute of Public Finance and Accountancy