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Hymans Robertson LLP is authorised and regulated by the Financial Conduct Authority
LGPS asset pooling
John Wright, Nicola Mark12 January 2016
2
The background
Fund merger seemed likely?
Brandon Lewis at NAPF
DCLG / LGA call for
evidence
Hymans Research for
DCLG
First good data on investment costs
+ international comparisons
Criticism of LGPS inv. costs but bad
data
Compared fund merger with
investment pools. Quantified
possible cost savings. Analysis of performance.
Consultation objectives: 1) managing
deficits; & 2) investment
efficiency
Hymans/CEMinvestment cost benchmarking
May 2013 June – Sept 2013 Nov – Dec 2013
FT article
3
The background
SAB analysis of CfE responses & letter to minister
DCLG consultation
London Councils give London CIV
green light
Themes:-use of asset
pooling? -use of passive?-use of in-house?
Consider options for managing deficits
Jan 2014 Feb 2014 May/July 2014
Collective Investment Vehicle for London
Boroughs.Voluntary
participation.
Forced fund merger ruled out.Instead consulted on asset pooling
and greater use of passive
Pre-election pause
4
Summer Budget 2015
“pool investments to significantly reduce costs, while maintaining overall
investment performance”
“sufficiently ambitious” proposals
5
October 5th - Conservative Party Conference
“…we’re going to work with councils to create .. half a dozen British wealth funds spread across
the country,”
“It will save hundreds of millions in costs, and, crucially, they’ll invest billions in the infrastructure
of their regions.”
Latest government thinking?
7
Where we are nowFund merger
Mandating passive
Local decisions on manager choice
Increased investment in infrastructure
Pooling investments
Local decisions on asset allocation
8
What government is looking for
Pools with significant scale (c£30bn?) Significant savings (hundreds of millions annually?)More investment in (UK) infrastructureExplain how governance will workExpected savings quantified and evidencedSavings able to be monitoredA fall back or default for non participants? A clear picture of how various initiatives fit together
Proposals must be “sufficiently ambitious”
9
Expected publication - November
Statement of criteria for pooling proposals (NOT a consultation)
Consultation is happening now ‘informally’ through discussions
Consultation onInvestment Regulations: what needs to be liberalised to facilitate CIVsBackstop legislation for funds not participating in pools
Potentially a formal response on the last consultation
10
Working assumption: criteria for pooling
SCALE
+ simplicity
Autumn statement: Pooling Criteria & Guidance
12
November 25th – Autumn Statement
“up to 6 British Wealth Funds … at least £25 billion of Scheme assets each”
“reduce costs while maintaining overall investment performance”
“wider ambition of matching the infrastructure investment levels of the top global pension funds”
13
What is happening now?
25th November 2015Criteria for pooling published
not a consultationConsultation on
Investment Regulations: liberalisation to facilitate CIVsBackstop legislation for funds not participating in pools
Submit proposalsInitial 19 February Detailed 15 July
14
Criteria for pooling confirmed
SCALE
15
Criteria for pooling
CriterionScale • Up to 6 pools, at least £25bn eachGovernance • Accountability between pool and local cllrs
• Local authority holding pool to account• Resources and skills in pool
Savings & VFM
• Fees, hidden costs, transparency• Benchmark to 2013 and now• Estimate savings over next 15 years• “At least” maintain performance • Active only where can show delivers value• Report performance vs passive
Infrastructure • Improved capacity and capability to invest• State proportion now and “ambition”
16
Criteria – more detail (1)AspectActive • Use only where can show delivers value Choosingmanagers
• “will need to be …” at pool level (3.30)
Where decisionsare made
• Strategic asset allocation local (bonds & equities?)
• Pool determines which aspects of asset allocation are taken by pool …with VfM proviso (3.28)
Local fund link to pool governance
• Maintain clear link between pool and pensions committee eg shareholding exercised by a member of the pensions committee (3.25)
• Invest in more than one pool allowed? (1.3 A)
17
Criteria – more detail (2)AspectDirect property
• Don’t need to pool existing property (3.19)• Pooling for future new allocations
Investing outside pool
• Individual funds make case? (2.2)• But only existing and prove VfM? (3.16)
Illiquid assets • 10% of assets, 40% of fees. • national would deliver greater scale and
efficiency … waive £25bn minimum (3.15)Infrastructure • aim to invest directly? (3.66)
• more likely to reduce costs by pooling nationally? scale to buy-in or build up in-house expertise (3.62)
Locallytargeted
• Unclear? (3.12)
18
Criteria – more detail (3)AspectESG • Context – policies must enhance ability to
manage down deficits and pay pensions when due
• Guidance will be issued to clarify - policies not contrary to government policy
• Via pool share best practice, improve capabilityIn-house management
• A pool of internally managed assets could further reduce costs and increase resilience
• Alternatively, new pools might work with in-house teams to take advantage of lower costs
Timing • Structures could be in place in 18 months• Liquid assets transfer by 2018• Illiquid likely to take longer
“Back-stop” legislation
20
Backstop legislation:Secretary of State power of interventionEvidence that an administering authority
Is ignoring information on best practice, e.g. by not responding to advice provide by the scheme advisory board to local pension boardsIs not following the investment regulations, e.g. is failing to participate in one of the large asset pools or is proposing a pooling arrangement that does not adhere to the criteria and guidanceIs carrying out another pension-related function poorly, such as an unsatisfactory report under section 13(4) of the Public Service Pensions Act 2013 (requires a person appointed by the SoS to report on whether the actuarial valuation of a fund has been carried out in accordance with Scheme regulations, in a way that is consistent with other authorities’ valuations and so that employee contributions are set to ensure the solvency and long term cost efficiency of the fund.)
21
Process of intervention
Requiring an AA to develop a new investment strategy statement that follows guidanceDirecting an AA to invest all or a portion of its assets in a particular way, e.g. through a pooled vehicleRequiring that the investment functions of the AA are exercised by the SoS or his nomineeDirecting the implementation of the investment strategy of the AA to be undertaken by another body
Current thinking
23
Where we are now
Change is certain Likely outcome regional / likeminded Multi-asset Pools (MAPs)Local funds retain strategic asset allocation responsibilityLocal funds will hold investment pools to accountGovt wants to know what funds will do & who with Project POOL is about the whatEach fund will need to consider who will work withFlexibility in guidance helpful
You can shape an outcome that meets your needs and government objectives
24
Submit proposals to governmentDeadline What is requiredINITIAL19th Feb
• Initial proposals • Include commitment to pooling• Describe “progress towards formalising arrangements” • Individual or joint submissions or both
FINAL15th July
• Refined and completed• Fully address the criterial set out• Information for evaluation of proposalFor each pool: • Joint proposals• Governance, structure, implementation planFor each authority:• Individual return• Profile of costs and savings• Transition profile for your assets• Rationale for your assets held outside of the pool in LT
25
Findings of Project POOL
Preferred approach is Multi-asset Pools (MAPs) formed by regional and/or likeminded groups of funds For most asset types, regional pools may give sufficient size to get majority of scale benefits / fee reductionsRegional or likeminded groupings also give individual funds more involvement in governance of poolsFor infrastructure, a national vehicle may be best (MAPs Plus)Some pools may have choice of in-house and external management – effectively a manager choice and same due diligence should apply
Report due to be published soon
26
Pools are beginning to form
London (CIV)
Regional or “like-minded” groupingsMulti-asset pools. Max 6 pools. Min £25bn.
Northern
Central (Midlands)
ACCESS[Central,
Eastern & Southern]
WalesSouth West
LPFA/Lancs
Border to Coast[Cumbria,
Surrey, East Riding]
27
ACCESS…. November statement
1. Officers working to explore the opportunities & challenges of the Govt pooling agenda (whether by this group, others or a combination) in order to be able to inform s101 Cttees
2. Supporting JWG / Project “POOL”
3. s101 Cttees will require time consider POOL’s outcomes before determining next steps (“what” before “who”)
4. Best outcomes will combine appropriate timescales with effectively managed transition
28
Features of ACCESS pool
Look highly likely to achieve scale criteriaNo single dominant fund. Funds range in size but with a small number of exceptions are broadly similar in size (most in the range £2-5bn)Manageable number of funds for participation in governance (expect c9-11 funds)Similarities in investment approach (asset types used) and similarities in managers used (top 12 managers by AUM cover c. 2/3rds of the assets of potential participants)Blank canvas – all participating funds in at the beginning and are able to help shape design of the pool
29
ACCESS: commonality by managers
0%
2%
4%
6%
8%
10%
12%
14%
16%
% o
f Gro
up a
sset
s
2/3rds of assets with 12 managers
30
Principles of the ACCESS pool
Collaborative Control and local decision making
Objective, evidence based
decisionsProfessionalism, risk management Equal voice in
governanceSimplicity
Evolution &
InnovationEquitable cost
sharing
Cost control
31
Key Features of ACCESS group of funds (draft)Common features of the group of funds likely to participate include:1) No single dominant fund. Funds range in size but with a small number of exceptions
are broadly similar in size (most in the range £2-5bn)
2) Manageable number of funds for participation in governance (expect c9-11 funds)
3) Similarities in investment approach (asset types used) and similarities in managers used (top 12 managers by AUM cover 2/3rds of the assets of potential participants)
4) Although not a deciding criterion for pooling, the funds are reasonably close geographically which will be helpful for joint working and governance
5) All use external managers (no in-house management functions within the group of funds)
6) Participating funds have until now focused on what is the right approach to pooling before considering who they will work with
7) Blank canvas – all participating funds in at the beginning and are able to help shape design of the pool
8) No intention to set up an investment management business
9) Apolitical
32
Aims & objectives of ACCESS Pool –Mission Statement
1) To provide a range of asset types necessary to enable participating funds to execute their locally decided investment strategies.
2) To enable funds to achieve the benefits of pooling investments while preserving the best aspects of what is currently done locally and the desired level of local decision making and control.
3) To help participating funds to execute their fiduciary responsibilities to LGPS stakeholders, including scheme members and employers, as economically as possible.
33
Principles of the ACCESS Pool 1) All participating funds will have an equitable voice in governance.
2) The pool’s governance will reflect the participating funds’ preferences in terms of which decisions are made locally by individual funds.
3) The participating funds will work collaboratively.
4) Decision making will be objective and evidence based.
5) The pool will maintain standards of professionalism and risk management appropriate to the responsibilities of managing one of the biggest pools of pension assets in the UK.
6) The pool will avoid unnecessary complexity in its approach.
7) The pool will evolve its approach to meet the changing needs and objectives of participating funds.
8) The pool will be open to innovation that will enable it to better serve the pool’s participants.
9) The pool will be established and run economically, avoiding unnecessary cost.
10) The pool’s costs will be shared equitably.
34
Next steps
ACCESS Project Management appointment Detailed plan to 19 February 2016Government submission Detailed project plan to enable July submission Find memorandum of understanding between participants Workshop for elected members of all participating funds February/March
Any questions?
Hymans Robertson LLP is authorised and regulated by the Financial Conduct Authority
Initial data summary
7 January 2016
37
ACCESS: commonality by managers
0%
2%
4%
6%
8%
10%
12%
14%
16%
% o
f Gro
up a
sset
s
2/3rds of assets with 12 managers
38
Asset class split
Total equities60%
Total fixed income19%
Total property10%
DGF Multi-assets5%
Private equity3%Infrastucture
1%Other2%
39
Listed equities only (c£22.7bn)
Active Passive
Legal and General
54%SSGA32%
UBS6%
BlackRock8%
Passive equity manager as % of total passive assets
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
Baillie Gifford Newton Schroders
Largest active equity managers as % of total active assets
40
Bonds only (c.£7bn)
Active Passive
L&G69%
SSGA24%
BlackRock7%
Passive bond manager split
0%
2%
4%
6%
8%
10%
12%
M&G GSAM Schroder Henderson Baillie G
Active bond managers as a % of active bonds
41
Multi-asset DGF
c.5% of total assets (£1.7bn)12 mandates
Pyrford X2Newton X2Baillie Gifford X2
Largest LGT (£383m)
42
Property
c.10% of total assets (£3.6bn)At least £1bn direct
No managers with multiple direct mandates
At least £1bn fund of fundsManagers with multiple mandates
CBRESchrodersAviva
43
Private equity
Harbourvest 30% of group private equity (6 Funds)Hamilton Lane largest individual mandateOther multiple mandates
Standard LifeAdams StreetPantheon
44
Infrastructure
Fund of funds exist alongside single fund investmentsMultiple managers include
PartnersM&GUBS
45
“Other”
IncludesTimberlandPrivate DebtManaged futuresCashCurrency overlay
46
Summary
Notable mandate overlap exists, most notablyPassiveActive listedDGF Fund of funds property and private equity
Further data tidying required (most notably fixed income and alternatives)Classification of mandates to consider
Any questions?
48
Outside the pools
“…presumption that all investments should be made via the pool…
…limited number….might be less suitable, such as local initiatives or produces tailored to specific liabilities”
“prepared to accept that some existing (directly held) property assets might be more effectively managed directly and not through the pool”
49
Outside the pools
Existing closed ended funds?Direct property?Local investment?Cash?Others?
Any questions?