Upcoming events

Please find below some upcoming events our team members will be attending:  12th December 2018 - WHEB Christmas Investor Tea 2018 - London - Mukesh attending 17th - 18th January 2019 - 15th Annual LGPS Governance Conference 'Clarity in Confusion' - Bristol - William is participating in a roundtable on responsible investing​

William Bourne attends LAPFF Annual Conference

On 6th - 7th December 2018, William attended The LAPFF Annual Conference in Bournemouth.

What elements are needed for good governance over shared services?

All the eight asset pools mandated by the Government are now up and running, which is a tribute to the hard work of many people within and outside the LGPS.  There is an accompanying drive to share other non-investment services in order to gain economies of scale.  It is a sad fact of life that some of these ventures will succeed, while others will run into problems.  This is where good governance structures are essential. Delineation of the different bodies - where interests overlap, where they are aligned and where they are less so - is the first requirement.  The Government is about to launch a consultation over whether to separate funds from administrating councils.  This would be a move in the right direction but there also needs to be recognition that even services with shared interests are not always aligned. For example, the pension fund may wish the emphasis to be on service quality, while the council’s focus is on saving money.  In the case of the pools, which are in most cases separate entities, Board members may have their own agendas which diverge from their customers.  There should always be a service level agreement between the fund and service provider, both to set out expectations and a process for resolving conflicts and problems such as non-performance.  Key Performance Indicators (KPIs) are an important monitoring mechanism but on their own insufficient.  In the private sector sanctions tend to be imposed or the relationship is terminated if the service-provider fails to meet the agreed targets.  With shared services identifying effective ones is more difficult.  Any financial penalty ends up penalising either the pension fund member or the local tax-payer.  Termination is difficult, perhaps impossible, if the shared service has been agreed at council level or, as with the pools, is the result of a Government directive. There are two other vital elements of good governance over these complex relationships.  The first is a body with clear powers to effect change in the event of non-performance, whether that be to terminate the relationship or to replace senior management.  The second is sufficient resources to achieve this in practice. Most of the pools have put the elements described above in place, albeit they are so far untested, and the funds are in many cases short of governance resources.  However, my big question is whether the shared service arrangements which MHCLG is encouraging are doing the same. Find out more about our services here.​

William Bourne attends East Sussex Pension Fund Employer Forum

On 23rd November 2018, William attended the East Sussex Pension Fund Employer Forum. 

William bourne attends LPFA Employers Forum

On 13th November 2018, William attended the LPFA Employers Forum in London.

Charities and climate change

As responsible investors, pension funds are expected to take Environmental, Social and Governance issues into consideration when investing.  The buzz word today is sustainability and the theory is that as long term investors it is in their financial interest to invest in sustainable business models. Pension funds have regulatory frameworks and guidance such as last year’s Law Commission report, which they can use to distinguish between decisions taken for financial as opposed to non-financial (call it ethical if you will) reasons.  Fiduciary duty has to predominate, including taking sustainability into account, but non-financial reasons are permitted if certain tests are passed. Charities and endowments operate under the Charity Commission’s investment guidance CC14 and may legitimately choose to place their charitable objectives above financial returns.  They seem, however, to make heavier weather of this distinction.  Witness the Church Commissioners’ latest wrangle over Amazon and the departure of the University of Cambridge’s top investment team over climate change. Charities already have to identify clearly where they are making Programme Related Investments (PRI), ie. those done in pursuit of their charitable objectives.  They are also likewise able to not invest in certain companies for non-financial reasons if they are in conflict with them.  In our view, where neither of these is the case, charities and endowments should be following similar guidelines to pension funds.  For example, taking climate change issues into account would be obligatory but divestment from fossil fuels without consideration of the financial impact would not be – unless of course that were in alignment with the charity’s charitable objectives.  Some Trustees and University Council members may be less than clear about their duties on this front. Linchpin Advisory Limited provides investment and governance advice to both charities and pension funds. To learn more please click here.​

William Bourne attends Nottinghamshire Local Government pension fund agm

On 4th October 2018, William attended Nottinghamshire Local Government Pension Fund agm in Nottingham. 

LGPS is close to full funding in aggregate but will contribution levels still have to rise?

The 2016 Section 13 report on the LGPS by the Government Actuarial Department is at long last published.  It provides a more consistent basis for comparison between funds and follows the ‘dry run’ published in 2017 on the 2013 valuation.  One major purpose of the Section 13 report is to review the long-term viability of the Scheme and highlight where measures need to be taken.  Given benign asset markets and higher contributions, it is no surprise that there has been a marked improvement here.  On GAD’s best estimate basis (without the level of prudence embedded in local actuarial valuations), the LGPS as a whole was 106% funded in 2016 and roughly 2/3 of individual funds had funding levels of over 100%.  Since March 2016, of course, funding levels will have risen substantially higher. The second purpose of the report is to promote consistency so that comparisons between funds are easier.  Here their major comments are aimed at the four actuarial firms who serve the LGPS, and they focus particularly on the range of discount rates and mortality contributions used.  Their major point is that these seem to be done not on justifiable local differences but simply according to which actuary is used. The report distinguishes between ‘presentational’ and ‘evidential’ consistency.  It is hard to argue against the former and GAD suggests a dashboard approach.  The latter is more complex: the actuaries argue with some reason that enforcing a single methodology would reduce innovation and evolution.  We would also argue that there is some systemic risk if all actuaries are forced to use the same model, as they have for example in the private sector. The Section 13 report also provides an Asset Liability model to try and identify whether contributions might need to go higher.  It concludes that in about 75% of scenarios there will be a rise.  However, this is based on explicit assumptions which we would argue are unrealistic, primarily that the conditions prevailing in March 2016 (ie. extremely low bond yields and, after seven years of QE, very low asset price volatility) would continue.   With asset prices nearly 20% higher, gilt yields no lower and secondary contributions falling away, we would challenge the report’s assertion that higher contribution levels will be needed generically.  If the GAD report does turn-out to be correct, and contributions have to rise when the Scheme appears fully funded, top class employer communications are going to be vital.

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