Agenda item

The Investment Manager presented the report.

Pooling of Investments

She drew attention to the DCLG’s criteria and guidance document, which was attached as Appendix 4 to the report (agenda page 71). The key criteria were listed in paragraph 4.4 of the covering report. She drew attention to the criteria that pooling proposals must demonstrate reduced costs with no deterioration in investment performance, and that pools should improve the capacity to invest in infrastructure.

There were very tight deadlines for the next stages of the process as detailed in paragraph 4.4(b) of the covering report.  An outline proposal has to be submitted by 19 February next year and a detailed proposal by 15 July 2016. The Government will examine whether initial pooling proposals are likely to meet their objectives and, if necessary, will have “conversations” with funds.

The SW group of funds is the most advanced on progress to pooling. They had commenced a joint project in August 2015 following the Chancellor’s announcement in July. The SW group is looking for additional partners, including funds outside the Southwest, and has changed its name to Project Brunel. Oxfordshire Pension Fund had recently decided to join the group. It is expected that the £25bn pooled investment target will be achieved.

She suggested that it was important that the Government had set a baseline for cost savings and that this recognised that significant savings had already been achieved through framework agreements and changes to procurement, for example.

A meeting had been arranged in January 2016 for the Chairs and Vice-Chairs and Section 151 Officers of all the funds at which the business case would be discussed. All the relevant Councils/funds would have to decide on whether to accept the pooling proposal in principle by 5 February. This would leave two weeks for any remaining details to be settled before the 19 February deadline. Because of this timescale it was proposed that the power to approve any proposals or expenditure relating to the project be delegated to a working party, with an opportunity for all Members to comment.

The Committee then debated a number of issues including the

-  The appropriateness or not of a geographical grouping

-  Ability to invest in local infrastructure

-  The apparent lack of joined-up thinking in Government that could lead to projected costs savings from pooling being negated by MIFID II.

The Head of Business, Finance and Pensions responded that there was a history of co-operation between the funds in the Southwest, which made it easy for them to work together on pooling. Elsewhere large funds were establishing joint arrangements with smaller funds in other areas, like the London fund working with the Lancashire fund. In many cases geographical factors were not the main drivers. The Investment Manager added that shared values were important, and this would be made clear to potential new partners.

A Member said that having recently attended a recent LAPFF meeting, he was aware that civil servants recognised the difficulties in the way of co-operation because of differences between funds. He was not convinced that the Government would be able to comply with its own timetable.

A Member said that the Avon Fund was efficiently administered by its local officers and she was concerned that administration might be centralised.

The Head of Business, Finance and Pensions said that as the pooling model developed, there would have to be compromises because of the differences between funds. They had different investment managers and different governance arrangements, for example. The work would really begin after the detailed proposal is submitted next July. There would be a long transition period. However, the Fund’s investment strategy would continue to be driven by the Committee in the interests of its members.

A Member said that she would regret any loss of local control over the Fund and that she would not wish to see investments being made to the detriment of the Fund’s members. The Head of Business, Finance and Pensions responded that strategy and policy would remain with the Committee. For operational reasons powers would have to be delegated to managing the pool, but there would be a recall process if the Committee felt that the pool was not working effectively.

The following points were raised by members:

• the  savings accruing to the Avon Pension Fund, the largest in the pool, would be less than those of the other funds. A request was made to officers to produce an assessment of the savings that could be expected for the Avon Fund

• votes on pool investment decisions should be weighted in accordance with the number of members in each fund, so that smaller funds did not have undue influence

The Investment Manager responded to these points. She agreed that further work needed to be done on potential savings; this was difficult because investment costs changed over time as the strategy evolves. However, it would be reasonable to assume the larger funds would save less as they may already benefit from lower fee rates;  the project had been set up on the basis of equality across funds, hence one vote for each fund in a pool; equally the fund would not want to be disadvantaged by  a large fund joining a pool and acquiring a dominant influence over the pooling decisions.

There was then a debate about the circulation of information outside the meeting agenda, investing in infrastructure, delegation to a working party and proposed governance for the pooled body.

Members were not supportive of a working party, so the Investments Manager replied that officers would be happy to arrange a special meeting, but it could only take place after the report was ready and long enough before the deadline for submission to Government for any details to be finalised. Information had been circulated outside the meeting agenda as not all documents were available at the time the Committee papers were published. The document had been sent to Members so that they would have the information before the meeting. Things were happening fast and the pace of developments did not always fit well with the Committee’s meeting schedule and regular processes.

The Head of Business, Finance and Pensions explained that the detailed proposal to be submitted in July would have to be approved by the full council of each administering authority and by the Environment Agency. The submission in February would simply state that the pool would have a governance structure which could take one of various forms. Defining the structure would be part of the follow-on work, in which the Committee would be fully involved. The time frame was so tight that it was important that officers continued to work on the draft proposals. It was not certain that all the other funds in the Southwest would ultimately support pooling arrangements, though at present they seemed to be so inclined. A special Committee meeting would be arranged if Members wished to have one.

A Member objected to the Government doing things before legislation had been passed giving them the power to do them. When a Bill was eventually introduced, it might be amended in its passage through Parliament and there might be conflict between new regulations and existing legal rules about the fiduciary duties of trustees, particularly in relation to infrastructure investment. How will it be decided whether such investment is in the interest of the members of the Fund? He felt that the Government knew in broad outline what it wished to achieve, but lacked a clear sense of the powers it had, or would need to have, to achieve it. What the Government wanted to do might not be in the interest of the members of the Fund. Another Member asked how a Government minister would be qualified to take decisions about which infrastructure projects to invest in.

The Head of Business, Finance said that in the draft Regulations the Treasury was given powers to intervene if funds did not co-operate; it was better for funds to submit their own proposals that they believe will be in the best interests of their members voluntarily rather than have something imposed on them by government.

A Member said that she was concerned about whether the Fund was actually empowered to do things in response to a Government initiative. As she saw it, the role of the Committee was to ensure that the assets of the Fund were managed effectively, and Members believed they were doing that. However, because of this Government initiative the Committee had agreed to spend £25,000 of members’ money on a project on pooling, without knowing the amount, or the Fund’s share, of any costs savings that were likely to be achieved. She wanted assurance that the Committee was legally empowered to do this; perhaps the Council should be paying for this work. The Head of Business, Finance and Pensions replied that he had consulted a Council lawyer and had been advised that the Council had delegated to the Committee the power to appoint investment managers. The Committee had delegated that power to another body, though it was not entirely clear that it had the power to sub-delegate powers delegated to it by the Council. That is why any new arrangements would have to be approved by the Council. In response to a question from a Member, he explained that the proposal put to Council would be in the form of a recommendation from the Committee.

A Member said that she feared that responsibilities were being blurred, so it would be hard to identify who was to blame if anything went wrong. The Head of Business, Finance and Pensions that the new governance structure was emerging very slowly; the Southwest group had simply got on with work on this project on the basis that if they did not, something was likely to be imposed by Government. The Investment Manager said that what ultimately determined the Fund’s performance were the Funding Strategy and the Investment Strategy, which would remain the responsibility of the Committee; she recalled that a Government document had stated that asset allocation would remain the responsibility of local funds.

A Member said that it was important that the Committee should meet in the Spring, at a stage when it could still influence outcomes, rather than being presented with a fait accompli in the Summer.

The Head of Business, Finance and Pensions said that the Chair, the section 151 Officer and he would be attending a Project Brunel meeting in January at which they would report the Committee’s views and concerns.

The Chair assured the Committee that the officers and he recognised the seriousness of this issue. The Government was setting a challenging timetable, just as they were in relation to local devolution. He was confident that officers would continue to act in the interest of the Fund.

Consultation on LGPS investment Regulations

The Investment Manager reported that on 25 November DCLG had launched a consultation on revoking and replacing the current LGPS Regulations. New Regulations were required to facilitate the pooling of assets. Responses were required by 19 February 2016, the same date as the deadline for initial pooling proposals. The Regulations were based on a prudential framework. The requirement for a Statement of Investment Principles would be replaced by a requirement for a Statement of Investment Strategy, which would have to include the fund’s approach to pooling assets. There would no longer be a requirement for short-term performance monitoring; the focus would be on the longer term. There will be powers allowing the Secretary of State to intervene. The consultation document would be circulated to Members by email, and they were invited to let the Investment Manager have their comments.

RESOLVED:

1. To note the information in the report.

2. That an emergency meeting of the Committee will be held in early February at which a report and recommendations on pooling proposals will be presented.