The news this week that the Department for Business etc (BEIS) intends to crack down on using pre-pack administration to avoid corporate pension liabilities is good.  Over the past ten years, directors of companies large and small have used, or abused, the legislation to close down their company and set up a successor or ‘phoenix’ company to take on its activities but crucially without the pension liabilities or debts. Somebody has to pay, of course, and the normal course of action is for the Pension Protection Fund to take over the pension liabilities.  According to a report this week, 17% of the PPF’s clients are there through a process of pre-pack administration.  The pensioners concerned ‘pay’ through a reduced pension, but so do all pensioners because of the Pension Protection levy which is charged on all eligible DB schemes.     Such behaviour by directors is reprehensible, of course, but the underlying problem is the inability of companies to finance their pension contributions - Carillion’s collapse earlier this year demonstrates an alternative and equally unattractive outcome.   The real problem behind this is the huge increase in longevity over the past 30 years, vastly higher expectations for living standards and very low discount rates.  The rate of increase for the first two may well be slowing down but is unlikely to reverse significantly.  Discount rates could be raised but only if there is a break from the current methodology of using bond yields as their basis.  And there are too many large firms with their own agendas involved for that to happen quickly. The focus at government level is all about finding ways to increase contributions and, indeed, the Centre for Political Studies issued a paper this week with sensible suggestions to do this.  But isn’t it missing the other half of the argument – that, though it may be unpalatable, we may all need to adjust our expectations for our retirement?  Company directors’ unedifying behaviour with pre-packs is a symptom of the problem, not the cause, and BEIS’s reaction simply a sticking-plaster.

Investing in private assets late cycle - is there a case for hedge funds?

At the recent, excellent LAPF LGPS Strategic Investment conference, I was struck that there were eight presentations on investing in ‘alternative’ investment classes of one sort or another, compared to only two on equities and fixed income.  Behind this, of course, lies the make-up of the conference sponsors and behind that are fee trends.  For example, private equity fees are - if anything - rising whereas pooling has resulted in significantly lower fee charges for liquid asset classes.   Overall, as one presenter stated, in 2017 more money was raised for private debt and equity ($2.4tr) than public ($2.1tr).   While the bulk of this has been for mainstream assets, the hunt for returns is leading to considerable fragmentation into increasingly specialist strategies such as structured products, leasing, farmland and specialist property. Again, this should not be a surprise.  The mainstream areas of private credit and particularly private equity are looking crowded, with big money being raised and returns falling.  At this late stage in the cycle, smarter managers are therefore looking for niches with better return/risk characteristics.   Secondaries have been a popular target but at least in the area of private equity managers are having to pay close to, or even above, par to gain access. The same presenter commented on the wide range of outcomes in private markets.  Here there is a crucial difference: when investing in liquid markets, decisions usually have to be made on incomplete information.  The winner is whoever can make best use of the publicly available information in the least time, i.e. before the price has started to react.  In contrast, in many private markets there is full information and no time pressure; the key is normally access to good ‘deals’. In both cases, manager selection is crucial.  If we have to choose between a smart or a well-connected manager, we would therefore prefer the first in public markets and the second in private markets.    This leads us to suggest there is a case for investing in hedge funds, in that they are smart investors investing mainly in liquid markets.  Although they are often lumped in as alternatives, they should probably be considered in this context as investors in public markets.  Hedge fund secondaries are in our view an even more interesting niche at this stage of the cycle.  There is plenty of supply, very limited information and almost no competition.  All you need to find is the right manager, preferably both smart and well connected!  We are happy to make suggestions.

William bourne attends lapf strategic investment forum

On 16th-18th July 2018, William attended the LAPF Strategic Investment Forum in Hertfordshire.

Review of CIPFA guidance on Local Pension Boards

CIPFA has recently published their Guidance for public sector pension fund Local Pension Boards.  It reads more like an essay rather than traditional guidance, but there are plenty of ideas and examples to provoke thought.In particular, we agree with the suggestions that boards should: Meet before rather than after the main Committee (or equivalent) meeting.Have access to the exempt papers on a timely basis, which is not the case for every Board.Review items such as the risk register and COP14 compliance on a rolling basis.Focus on where functions are outsourced – we would add that this includes pools.Collaborate when reviewing the activities of pools. We particularly like the reminder that Boards “shall have the power to do anything which is calculated to facilitate, or is conducive or incidental to, the discharge of any of its functions” under 106(8) of the 2013 LGPS Regulations.  It is a reminder that it is not the case that Boards, like Beatrix Potter's Mr Jackson, ‘have no teeth, no teeth, Mrs Tittlemouse’. We would argue that more could and should have been made of how Boards add value.  This is primarily in their role representing employers and members, but also where, as in many cases, they can bring specific expertise to bear. The Guidance notes that the Scheme Advisory Board’s Guidance to the effect that Boards’ role may include “assisting with the assurance of transparent reporting from pools and ensuring the effective implementation of strategies by pools. Such involvement should include the consideration of provision of direct representation on oversight structures”.     It is the last sentence that causes us concern.  It seems to us that Boards should focus on assisting their Scheme Manager on the governance structures around pools and not get involved in direct oversight of the pools.  We note that the CIPFA Guidance’s governance diagram does not include any line between the Local Pension Boards and the pools, and in our view that is how it should be.  We do not see how direct representation will help and we believe it will lead to reduced governance clarity. To learn more about how we can help with governance matters please click here.​

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.


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. ​