Agenda item

A report of the Interim Director of Finance was submitted, the purpose of which was to:

 

•           Advise the Members of the Pension Fund Committee (the Committee) of an ongoing government consultation: “Local Government Pension Scheme (England and Wales): Next steps on investments” which set out a proposed direction of travel in relation to investment pooling on the Local Government Pension Scheme (LGPS).

 

•           Explain the process being followed in relation to the Pension Fund and Border to Coast Pensions Partnership (‘Border to Coast’) responding to the consultation.

 

•           Ask the Committee to agree and provide any comments on a draft response to the consultation on behalf of the Fund.

 

The Teesside Pension Fund was one of twelve (now eleven following a fund merger) founder members of the Border to Coast Pensions Partnership (‘Border to Coast’).  Border to Coast was acknowledged as one of the most successful of the eight pools, both in terms of the amount of assets that have been pooled and the strong positive relationships that existed between the pool members and with the pool company.  Border to Coast and its Partner Funds had also largely delivered the original pooling objectives the government set out in 2015.

 

The government had issued a consultation on next steps for LGPS investments in England and Wales which looked to build and accelerate progress towards greater LGPS pooling.  The stated objective was to achieve pools in the £50-75 billion and possible £100 billion range and to do this by initially encouraging/requiring all LGPS funds to complete the pooling process with their current pool and then reducing the number of pools from eight to an unspecified lower number.  The full text of the consultation document was attached at Appendix A to the submitted report.

 

Other aspects, as well as accelerating the pace and scale of pooling were also covered in the consultation which addressed the following five areas:

 

•           “First, the government sets out proposals to accelerate and expand pooling, with administering authorities confirming how they are investing their funds and why.  While pooling has delivered substantial benefits so far, we believe that the pace of transition should accelerate to deliver further benefits which include improved net returns, more effective governance, increased savings and access to more asset classes.  We propose a deadline for asset transition by March 2025, noting we will consider action if progress is not seen, including making use of existing powers to direct funds.  Going forward, we want to see a transition towards fewer pools to maximise benefits of scale.

 

•           Second, the government proposes to require funds to have a plan to invest up to 5% of assets to support levelling up in the UK, as announced in the Levelling Up White Paper (LUWP). This consultation sets out in more detail how the Government proposes to implement this requirement and seeks views on its plans.

 

•           Third, the government is proposing an ambition to increase investment into high growth companies via unlisted equity, including venture capital and growth equity. The government believes there are real opportunities in this area for institutional investors with a long-term outlook, such as the LGPS.

 

•           Fourth, the government is seeking views about proposed amendments to the LGPS’s regulations to implement requirements on pension funds that use investment consultants. These amendments are needed to implement the requirements of an order made by the Competition and Markets Authority (CMA) in respect of the LGPS.

 

•           Finally, the government is proposing to make a technical change to the definition of investments within LGPS regulations.”

 

Border to Coast, together with its Partner Funds, had been working to develop a joint response to the consultation.  The response was due to be approved by Border to Coast’s Joint Committee on 28th September 2023. Alongside this joint response, which all Partner Funds would be signing up to, each Partner Fund would also be submitting a response to government. These individual responses may emphasise particular aspects or cover areas of special concern to each Fund but were not expected to contradict the general collective approach being developed by all the pool participants. A draft response from the Teesside Fund was attached at Appendix B to the submitted report for the Committee’s comments and approval.   A table at paragraph 5.3 of the submitted report set out the questions from the consultation together with some summary comments on the collective response that would be given from Border to Coast and its Partner Funds, also consistent with the draft response from the Teesside Pension Fund.

 

Much of what the Government was proposing was in line with the approach to pooling that had already been adopted by Border to Coast and its Partner Funds.  For example, on the requirement to pool all listed assets by 31 March 2025, the Fund had to a large degree already achieved this – all the Fund’s actively managed equities were invested by Border to Coast (over £2.5 billion as at 30 June 2023) with only the Fund’s passive equities managed elsewhere (by State Street Global Advisors – around £0.6 billion as at 30 June 2023).

 

The areas the Fund emphasised in its response to the consultation included the following:

 

•           Re-iterating resistance to the Government’s continuing attempts to direct Funds as to how to allocate their assets. The 2015 consultation started with a drive to use LGPS Funds to pay for UK infrastructure projects, the latest iteration looks to leverage LGPS assets to help pay for the Government’s ‘levelling-up’ agenda.

 

•           Caution around the drive to invest in private assets – although private market performance has been very good over recent years, past performance is no guarantee of future outcomes, and with an era of ‘cheap money’ seemingly coming to an end there is a risk Funds could be directed inappropriately into illiquid investments that may not deliver expected outcomes.

 

•           The consultation blithely suggests the ‘deadline’ for the transfer of non-listed assets into Funds could easily be 31 March 2025 as well. In fact, there are significant barriers associated with transferring these assets.  One in particular the Government could alleviate would be to allow the transfer of property assets from a Fund to a Pool without incurring stamp duty.

 

The consultation period would close on 2 October 2023.  The Fund’s response would finalised following this meeting and submitted by the deadline.  The expectation was that the Government may either announce the outcome of the consultation or give a strong steer as to its likely announcement in the Autumn Statement (expected to be in November). The Committee would be kept up to date with future developments on the guidance and/or regulations relating to LGPS investment pooling.

 

ORDERED as follows that the:

1.         the information provided was received and noted.

2.         Fund’s response to the consultation was approved.