LGPS 101: pooling and private markets in advanced stages, but climate goals vary 

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As the Ministry of Housing, Communities & Local Government (ex DHLUC) is processing the responses in the recent LGPS consultation, we gathered additional data in line with its proposals, from annual reports and publicly available data. LGPS pooling is already in a quite advanced stage, with many pools already investing 70% of scheme assets or more. Private markets allocations are also quite high, but net zero commitments are sometimes unclear or completely lacking.
 

All but one LGPS pool have set up pooled investment vehicles 

 
The LGPS consultation collates some information about the governance models and levels of investment outsourcing. We looked into the investment portfolios of several LGPS pools to understand the consultation breakdown a bit better.
 
All but the Northern LGPS pool have established authorised contractual schemes (ACS) for the sub-funds they make available to the participating schemes. An ACS is a collective investment vehicle for professional and institutional investors, where a pool of assets is managed on behalf of investors in accordance with contractual arrangements. 
 
Each ACS has an operator (or manager) who is responsible for its operation, including investment decisions in accordance with the contractual arrangements between all participating schemes.
 

Three pools delegate investment management to external operators

 
The ACCESS pool, Wales and Brunel Pension Partnerships all use third-party operators.
 
The ACCESS pool and Wales Pension Partnership both use Waystone Management as their operator. Waystone builds, supports and protects investment structures and strategies for a variety of clients worldwide. 
 
Source: mallowstreet


For the ACCESS pool, Waystone manage all of the sub-funds available to the participating LGPS schemes, but each of them is invested in a single external asset manager. 
 
In contrast, for the Wales Pension Partnership, Waystone manage just two of the sub-funds, and the rest are managed by Russell Investments. Each is invested in one or more external asset managers. 
 
A similar approach is also adopted by the Brunel Pension Partnership, who use Thesis Unit Trust Management as their operator and each of the available sub-funds is invested in multiple external asset managers. 
 

The degree of internal investment management differs from pool to pool 

 
As one example, Border to Coast Pension Partnership are operators of their ACSs, and all the investments are managed in-house. Their holdings may include third-party funds, but we have not analysed this data in detail yet.
 
In contrast, London CIV is the operator and manager of all ACSs available to their participating schemes, but they may be invested in one or multiple third-party asset managers. For example, when the LCIV Global Equity Core Fund launched, Morgan Stanley were appointed as the underlying investment manager. 
 
As yet another example, LGPS Central mix investments in trusts, funds and individual securities in their sub-funds and act as the in-house operator for all ACSs.
 

LGPS pooling is in an advanced stage – and some pools are unlikely to exceed £50bn

 
The LGPS consultation is looking to accelerate the level of pooling in LGPS schemes. However, with a couple of exceptions, most participating schemes have already delegated over 70% of their assets to the pools, on average. 
 
Source: mallowstreet
 
The only exception are LGPS Central with pooling progress of 49%, and possibly the Northern LGPS, where questions can be asked about the level and form of pooling, given they do not have any ACSs. The ACCESS, Border to Coast, LGPS Central and London CIV pools have the most upside in terms of pound assets. 
 
However, interestingly, even after pooling is complete, four pools are unlikely to reach the £50bn minimum size the government would like to see: the Brunel, Local and Wales Pension Partnerships.
 

Private markets exposure is already sizeable

 
The way different pools report on their investments and performance varies greatly. We managed to collate sufficient comparable data for five pools, in a format roughly consistent with the LGPS consultation proposed disclosures. The asset allocations shown below are not too dissimilar from each other, with the exception of London CIV making greater use of listed equity and real estate, while LGPS Central and the Brunel and Local Pension Partnerships have higher exposure to private markets and infrastructure. 
 
Source: mallowstreet
 
However, it was not possible to consistently establish the following: 
 
 

Not all pools have net zero goals but they take social and nature factors into account 

 
While all pools conduct engagement activities and take part in voting resolutions on different subjects (with some reporting their results more detail than others), not all pools have formally committed to net zero or set intermediate decarbonisation goals. For example, ACCESS and Wales Pension Partnership lack either. 
 
For other pools, the level of detail varies, with London CIV and Brunel Pension Partnership having the most ambitious and detailed net zero goals. 
 
Source: mallowstreet
 
When it comes to social and natural capital considerations, approaches vary significantly, from merely integrating social risks, through incorporating these subjects in engagement, having an EDI policy for managers and internal teams, to making social and nature-based investments, including timber and forestry. 
 

How this impacts our research agenda

 
Gathering data from external sources can be time-consuming and lead to incomplete results. To close the gaps in our knowledge, we will undertake further research in the LGPS space this year. If you are interested in partnering with us to uncover unique knowledge and help solve the challenges these schemes are facing, please get in touch. 

 
Further reading: 
 
 

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