News & analysis
KENSINGTON AND CHELSEA EXIT SENDS SHOCKWAVES THROUGH POOLING SYSTEM
The first local government scheme to quit its pool has impli- cations on so many levels, finds Andrew Holt.
In what would be a first, the Royal Borough of Kensington and Chelsea’s (RBKC) pension scheme is leaving London CIV, a pool for local government schemes in the capital. In a decision that will have dramatic ramifications for pooling, a potential showdown meeting of RBKC’s investment commit- tee will take place in the second week of February. People close to the issue said the meeting was a rubber stamp to leave Lon- don CIV, not a debate about the merits of being part of the pooling system.
A statement from London CIV issued to portfolio institutional accepted the exit move by RBKC. “London CIV can confirm that the Royal Borough of Kensington and Chelsea have indicated that they are minded to exit membership of London CIV,” it said. Although the exit process will be a drawn-out affair. If, as is expected, the decision to exit is made at February’s meeting, RBKC would need to give notice by the end of March for an official and orderly exit from London CIV a year later. Dean Bowden, who became London CIV’s chief executive in December, expressed hope that RBKC would stay. “It would be our preference for RBKC to remain within the pool as it is our genuine belief that London CIV is able to deliver real value for all of our clients.” However, he added, if they want to leave, it will be amicable. “This is a decision for RBKC and should they choose to leave we will work with them to achieve this in as efficient manner as possible, making sure that exit arrangements include a framework for future collaboration and a basis for an ongoing cordial and commercial relationship.”
The decision can only be seen as a blow to the pooling princi- ple, as it would be the first time a pension fund has withdrawn from one of the eight LGPS pools since their inception in 2015. Councillor Quentin Marshall, RBKC’s pensions chair, outlined the position of the local pension fund, offering a conciliatory tone: “RBKC and London CIV are considering how their future relationship will evolve. No final decisions have been taken yet. RBKC remains committed to the principles underlying pool- ing, in particular, reducing unnecessary fees and costs.” He added: “RBKC recognises that each LGPS fund has differ- ent circumstances and investment strategies and that, for many, the London CIV represents an attractive partner.” Marshall was not open to taking additional questions at this time to offer insight, but he offered an olive branch, when admitting that he “does not rule out future co-operation on a mutually agreed basis”, with London CIV.
6 | portfolio institutional | February 2023 | Issue 120
What form such co-operation could take and whether these are just diplomatic words to ease what is a difficult situation, is open to question. Furthermore, the £800m RBKC scheme will unknowns by leaving London CIV.
face some
The key question is now the legal framework of pooling, pri- marily Regulation 72d, which mandates funds to commit to a certain pool. By wanting to walk away from the £48bn pool, RBKC breaks that rule. But there is a legal loophole, in that the regulation does not state funds have to commit assets to the pool, they just have to report to the government on their overall plans. To date, London CIV’s client funds hold £48bn in assets, of which 57% have been pooled. RBKC has £800m in assets but has not yet pooled any of them.
The loophole introduces a strange position where member funds can be part of a pool without committing to it in terms of assets. This raises the question: what is the point of being a member when you are not committed to it?
It also raises questions about whether RBKC will need to join another pool, an issue it has not commented on.
Government intervention
The next question is whether government can and will intervene in the situation. The legality of pooling regulation gives govern- ment the power to take over a fund if it is dissatisfied with it. But sources of portfolio institutional who were close to the issue all expressed confidence that the government is unlikely to intervene.
A fund quitting a pool presents a challenge to the government in other ways, with the trajectory of travel set out by RBKC is in clear conflict with the government’s ambitions. The government is keen on cementing pooling as the norm for local authority pension funds while achieving greater scale in the whole system – something that cannot be done if member funds leave. William Bourne, an independent investment and government adviser to the local government pension scheme, who is also a founder of advisory firm Linchpin, said: “We must not forget that ultimately the responsibility for investment lies with the part- ner funds, not with the pools, and committee members have difficult decisions to take when pools are not offering what they need to implement their investment strategies.” If RBKC does leave, it is not hyperbole to say it could contrib- ute to a new pooling system. One scenario that could emerge is a two-tier pooling universe: where happy and satisfied funds would drive pooling going forward and rebel unhappy funds revert to their previous standalone operating models. Which raises an important question: who would be the win- ners and losers under such a system?
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