Agenda item

The Head of Business, Finance and Pensions introduced this item. He said that the key issue discussed at these two meetings was one that all LGPS funds were currently grappling with: the Government’s requirement that funds should establish investment pools. The Government had issued criteria for pools, and had consulted on proposed changes to the investment regulations to allow the pooling of investments and investment in asset classes that were currently restricted. Criteria for pools included a minimum size of £25bn, an effective governance structure and the ability to invest in infrastructure. The Government will acquire the power to direct funds to invest in infrastructure, which raises the dilemma of how Government directions might be reconciled with the investment strategies set by local funds; clarification about this is being sought at the national level. All the pools were also grappling with the problem of how to demonstrate a capacity to invest in infrastructure. It was not clear what kind of infrastructure the Government wanted funds to invest in.

There were differences between pooling groups as to whether they were regional or and in the size of their assets. The value of all the LGPS funds in Wales only amounted to £12bn. Some funds had not yet joined pools. Project Brunel had been working with PwC to develop its proposals and had made its initial submission by the deadline of 19^th February. The Government required a clear separation between the monitoring of the investment pool and the setting of investment strategy and policy. The governance structure proposed for Project Brunel was a joint committee. The final proposal had to be submitted by July; this had to give an estimate of cost savings from pooling and indicate how the transition to pooling was to be implemented. Because of the amount of illiquid assets held by funds, the transition could take up to ten years. Project Brunel has to face the challenge of reducing the number of investment manager mandates from over a hundred down to twenty or thirty while still satisfying the strategic investment requirements of the individual funds in the pool. It was thought that the cost savings for the Avon Fund could be about £2m, but this was uncertain, because circumstances would have changed by the time that savings could be accurately quantified. He said that the experience of dealing with the pooling proposals had been an uncomfortable one for members of the Avon Pension Fund Committee, who were sceptical about the savings that could be achieved and were concerned that the Government’s timetable restricted their involvement in the process.

In reply to questions from Members he said;

• The aim was to pool all assets, but this was probably not achievable. Some funds had investments in asset classes that other funds did not. It might be that £18bn of the £23bn total assets of Project Brunel would be pooled.

• The Committee would no longer select investment managers, but would retain responsibility for the setting of investment strategy and policy. The investment strategy flows from the valuation, and determines the level of investment returns that are required. The Committee will choose the asset classes that it considers will deliver those returns at a certain level of risk.

A Member asked about the role of the Board in relation to pooling. The Chair noted that the Government had launched this initiative after the establishment of the Local Pension Boards, and that there was nothing about pooling in the relevant Regulations or Guidance. He believed that the Board should approach the issue by reminding itself of its fundamental duties, which were to secure the compliance of administering authorities with Regulations and The Pension’s Regulator’s Guidance and to ensure efficient and effective governance and administration. The Board’s only role in relation to pooling was to consider whether there was effective governance and administration of it by the Avon Fund. The Board should form an opinion on whether the Committee had considered the relevant issues, and, at an appropriate time in the future, on whether the governance structure for Project Brunel complied with the Regulations in force at that time. The Board could receive an update at its meeting in May, but could only begin serious scrutiny after the final submission in July.

The Head of Business, Finance and Pensions drew attention to another issue facing all funds: the EU’s Markets in Financial Instruments Directive (MIFID II). This was concerned with the classification of different types of investors and required investors to be properly qualified and/or experienced. LGPS funds would be classified as retail investors, which could pose the problems identified in Minute 46 of the 11^th December meeting. The implementation of the Directive had been deferred for a year.

RESOLVED

(i)  To note the minutes of the meetings of the Avon Pension Fund Committee held on 11^th December 2015 and 3^rd February 2015.

(ii)  To record that the Board is satisfied that the Committee followed a rigorous process in relation to the pooling proposals.