Sharing services and making it work for Scheme Managers

One of the themes at the excellent PLSA LGPS conference last week was a clear steer to increase the sharing of services in areas such as administration.  Minister Teresa Clay was explicit about the Government’s views.    The rationale for doing this is clear: it is not just economies of scale but the ability to provide a better service by having teams specialising in particular functions.  This is what the LPP pool has been doing by amalgamating offices in London, Preston and Hertford.  Some LGPS scheme managers have for some time undertaken the administration work for other funds, effectively sharing services albeit by an outsourcing arrangement.As with the Government’s pooling initiative, putting in place the right governance over shared services is important.  The first point is that the pension fund needs to be treated as a separate entity: if services are shared at pension fund level (as with pooling) that will happen; but if services are shared at council level and the pension fund bundled in alongside, it may not. The next question is who to share services with.  Historic arrangements are in place but there is also some logic in eventually sharing services with other pool members, as is the case with LPP’s founding members.  A further salient point in making this decision is which underlying software is used, as changing that is both complex and time-consuming. Finally, consideration needs to be given to what sanction a scheme manager has if the shared service is failing to meet the agreed standards.  As with pooling, in theory the authority can move administration to a different provider, but it becomes more difficult if either the council owns the shared service or if services are shared at council level.  The alternative is to force change internally but that requires a body with the power to do that – and this is not always in place. Linchpin has experience of what does and doesn't work in this area, and we are always happy to advise.​

William Bourne attends PLSA Local Authority Conference 2018

On 21st - 23rd May 2018, William attended the PLSA Local Authority Conference 2018 in Gloucestershire.

WILLIAM BOURNE AND MUKESH MALHOTRA ATTENDING CROSS POOL OPEN FORUM

On 27th March 2018, William and Mukesh attended the Cross Pool Open Forum in London.

A bee in my bonnet about stock lending

Stock lending is a practice which many, but not all, asset managers have participated in for decades.  The income received sweats equity assets a little harder and provides some extra liquidity to markets.  The stock lent is usually used to arbitrage tax differentials between different investors or to enable institutions wishing to go ‘short’ to deliver stock when they sell. However, I am increasingly wondering whether it really is consistent with the spirit of acting as a responsible investor, as pension funds are mandated to do.  One of the key tenets of the Stewardship Code is to use your vote at General Meetings but if you have ‘lent’ your stock you have to recall it in time to do that.  In theory, this is always possible but it undoubtedly adds brittleness to the system: the owner may be up against a tight deadline and the chain of stocklending may involve several parties.    My other concern is that the lender of stock cannot prevent his stock being used for aggressive shorting, which I believe is directly contrary to the notion of being a responsible investor.  The Stewardship Code simply states that investors should state their policy on stock lending, so the practice is not in direct contravention, but I cannot bring myself to say that it is consistent with the spirit behind the Code. Ultimately, the judgement investors have to make is whether the return from lending stock makes it worthwhile and I am aware that passive investors in particular often rely on the practice to cover the frictional costs of running an index portfolio.  Buzz, buzz, buzz… If you have a view on this subject please do contact me. ​

William Bourne attends SPS Local Authority Pension Fund investment issues conference

On 15th March 2018, William attended the SPS Local Authority Pension Fund Investment Issues conference in London.​

William Bourne plays devil's advocate at the LAPF strategic investment forum

On 7th February 2018, William participated in the Devil's Advocate Panel during the afternoon sessions at the LAPF Strategic Investment Forum in London.​

DCLG response to Law Commission paper on social investment

The DCLG slipped out an interim response to the Law Commission paper (274) on Pension Funds and Social Investment a couple of days before the Christmas break.  The recommendation is to accept the original paper’s recommendations to encourage pension schemes to place more emphasis on ESG considerations when investing, although DCLG will consult on some before enacting them.  While the LGPS is statutory rather than trust-based, legal opinion has previously made it clear that these changes will also apply to them. The most important new requirement is for pension schemes to ‘state their policies’ in relation to how they evaluate investment risks, including ESG considerations, in the long term (our italics).  While most funds will already be considering the financial risk to portfolios from climate change, there will now be a legal requirement to do so, or at least to state publicly if choosing not to.  The implications are wider than just climate change: it will become less easy for a company to pay its senior management disproportionately, for example. The second proposal is that pension schemes should say how they will consider and respond to members’ ethical or other concerns.  Again, a fund may choose to ignore them but will have to state publicly that it is doing so.  We expect most will find it easier to find a way to respond. If an administering authority wishes to make an investment or divest for ‘non-financial’ reasons, it will still have to pass the two tests set by the Law Commission: no significant financial detriment and that members share the concerns.  There is some interesting language on the latter point in the Law Commission paper:  if an authority does conduct some form of broader consultation - as opposed to, for example, simply asking the Local Pension Board - the bar to pass the test is not necessarily complete agreement. However, a court would consider a significant minority disagreeing sufficient to fail it. The administering authority would then have to make its investment decision on financial grounds only.  Apathy and lack of response need not be taken as disagreement. In practice, most LGPS funds seem to prefer engagement - through LAPFF or more directly - to divestment. However, at the margin, the legislation will perhaps make it clearer what is required in order to divest from, for example, fossil fuels and will make it harder for funds to ignore well-organised pressure groups.    ​

William Bourne attends 22nd LAPF Annual Conference

On 6th to 8th December 2017, William attended the 22nd LAPF Annual Conference in Bournemouth.

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