Feature | Pooling
were already in place, individual local authorities might have different expecta- tions of what the pool can deliver. On the opposite side of the pooling spec- trum is
the Northern Pool. While the £46bn collaboration between the local authorities in Greater Manchester, West Yorkshire and Merseyside recognised the benefits of
collectively managing infra-
structure assets early on, it remains scepti- cal of attempts to streamline the process. As one of the founding members of the GLIL infrastructure platform, the Greater Manchester Pension Fund has pooled the management of its infrastructure assets with other authorities since 2015, which was before George Osborne’s announce- ment of the government’s pooling policy. Northern Pool also questions whether the benefits of integration extend to all asset classes. Its leadership has therefore taken a much more reserved approach to integra-
“If there is a real benefit in pooling that is where it will come, in that respect Northern is ahead of anybody else and they are also managing assets at very low costs.”
OUTLOOK
In early 2019, it looked like the different approaches to pooling might result in a clash. The Ministry of Housing, Communi- ties and Local Government published draft guidance which attempted to speed up the pace of pooling and streamline the process. The document, which foresaw the introduc- tion of a mandatory ACS structure for each pool and a target to complete the majority of the pooling process by 2020, would have put significant pressure on some pools. And so it was met with resistance, particu- larly by Northern Pool. In a letter to the ministry, its councillors warned that the new proposals had lost sight of the desired outcomes and instead attempted to impose
We are very clear that we are develop- ing the building blocks but allow partner funds to set the strategy. Rachel Elwell, Border to Coast
tion. It is the only pool which has not launched a regulated entity and focusses on only pooling its infrastructure and private equity assets. This stance has put the pool at odds with central government, which tar- gets deeper levels of integration. But Northern’s approach should not be dis- missed and was in line with the guidance set out in 2015, says John Raisin, an inde- pendent adviser to the pools. “The govern- ment was right in not being too prescrip- tive and accommodating for the fund’s differences. “The Northern Pool, in my opinion, is an appropriate pool because they have concen- trated on the areas where they can establish the best competitive advantage for them- selves,” Raisin adds. “Not in listed equities but by focussing on alternatives and infra- structure in particular.
a “one-size-fits-all” approach to pooling. Northern Pool also warned that establish- ing an ACS structure would increase costs by between £10m and £15m a year. So, the pool provided a detailed case explaining why the recent guideline was in breach of UK and European law. Northern Pool argued that the recent draft guidance imposes unfair additional bur- dens on the pools, fails to take the value for money criterion into account and contra- venes the European IORP Directive. The latter says: “Member states shall not request IORP’s registered or authorised in their ter- ritory to invest in particular asset classes.” However, a source has told portfolio institu- tional that there could be a revised draft of the government’s consultation on pooling in the pipeline. At the time of writing, the ministry was not available to confirm this.
36 | portfolio institutional | December-January 2020 | issue 89
Regardless of the evolving regulatory con- text, most pools are optimistic that consoli- dating their assets has made them more resilient for a potentially more volatile political and economic climate. Brunel chief investment officer Mansley argues that shorter term costs will come with longer term benefits. “Pooling works – we are building organisations that are capa- ble and cost efficient. There is now a greater amount of firepower than we have ever seen in LGPS before.
“There is the challenge that pooling may appear to cost more than initially planned. This is partly because of asset allocation shifts into more expensive asset classes (notably, private markets). It’s also because the scope of cost information is radically changing, giving us more information. “So, previously individual schemes were often in fund-of-fund arrangements where there was little information available on the true total cost, whereas we now have far greater transparency,” he adds. “Improved disclosure is not the same as higher costs, and we believe that pooling will deliver sig- nificant cost savings in the long run. “The biggest danger to the pooling process is being undermined by criticism when there is not a better alternative. Reversing the decision to pool is not a realistic option – more likely is the option of mega pooling. Also, it’s worth bearing in mind that a lot of the criticism regarding pooling comes from people trying to get work consulting for the LGPS funds,” he adds. LPP’s Tomlinson is also optimistic. “The success of each pooling strategy is depend- ent on the market environment. If we enter a world that is facing severe economic chal- lenges, such as distressed assets and liquid- ity issues, those with a clearer governance structure will be able to act more authorita- tively. Within LPP we are managing liquid- ity in a way that should markets get ugly, we are able to look across the portfolio and adjust our strategy, something that would not be possible in a more fragmented port- folio. “So, this is about seeing the pools as an opportunity to position ourselves for a more challenging investment environment.”
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