Collaboration (Or Lack Of) Between The Six Pools

The Government wants to encourage collaboration between pools, as there are some asset classes where  it does not make sense for each pool to create its own product.  However, there are also barriers, and we have not seen this happen in practice.  This article looking at what is needed to encourage cross-pool collaboration was originally published in Room 151 under the title 'Now is the time for a re-set on cross-pool collaboration'.    

The Government’s Fit For The Future consultation encouraged the six surviving pools to collaborate more.  For reasons of cost and scale it does not make sense to build six separate teams for one asset class, whether this be private markets or passive investment.  But despite warm words there is no obvious sign that the pools are taking heed.

The clearest evidence is that GLIL and the London Fund are still trotted out as examples.  GLIL, an infrastructure joint venture between LPPI and the Northern pool, was set up nearly ten years ago.  The London Fund, a housing venture between LPPI and the London CIV, launched in 2020.

Instead, the pools are busily building teams to take on their new responsibilities under the Pension Schemes bill.  If they have the time to do that, surely they should also be looking at cross-pool joint-ventures to provide products and services to partner funds more efficiently?

In my view culture is the main impediment.  The LGPS has always been a collegiate community, happy to share both problems and solutions.  Over the last six months they have demonstrated that in spades as together with the pools they have buckled down to delivering the demands set by Government.

The pools have a lot of that DNA, simply because many of their original executive teams and staff came from the partner funds.  But this is also the root of one of their shortcomings – the unwillingness to accept that there are also elements of competition between them too. 

They compete for staff from the same pool of experienced investors who are willing to consider moving to the public sector.  They compete for the same investments, especially in the areas of infrastructure and local investment.  In the future they may be competing to survive too, if the Government decides to reduce the number of pools further.

The lack of an explicit profit motive is another reason why collaboration has not happened.  In the private sector, the need to grow profits for shareholders creates a clear focus on the best way to run a company’s activities.  Profit also provides a clear performance metric and an incentive to take difficult decisions, such as closing subscale products or internal teams.  

Now is a time when all six pools have the opportunity to re-set:  four have new partner funds coming on board and two are building new structures to set up FCA authorised structures.    I believe that re-set should include recognition that to succeed pools’ cultures need something more than the historic LGPS culture, admirable in many ways though it is.  

The timing is propitious for several reasons.  There has been a significant shift towards recruiting senior management from outside the LGPS.  To an extent the remuneration shackles have rightly been thrown off, giving senior management a greater incentive to take tougher decisions – they have more to lose if they don’t.    The need to deliver the Government’s demands over Fit For the Future has also led to more collegiate behaviour between pools and funds. 

Perhaps most importantly, because leadership in this area must come from the pools’ Boards, there have been several new Board appointments in both the four existing entities and of course the new ones.  They will be less constrained by history and I hope more willing to look at new ways of doing things. 

Despite all this, the tension between collaborating and competing remains.  One solution would be to introduce a profit target, like the private sector.  Resulting profits could be shared out among the partner funds as a dividend.  But the optics of a pool making profits out of partner funds may be too difficult, and other ways are needed to encourage senior management to think cross-pool. 

There are some obvious conflicts of interest to be mitigated:  collaboration may reduce a pool’s own pool income; funds will have more visibility how other pools perform, possibly to the disadvantage of their own;  internal teams may need to be terminated; managers may find their own position at risk;  investment governance may become more complex and distant.  But if another pool has a better product or solution, they should at least consider it.

This is why I believe this is a problem of culture first and foremost.  I sympathise with the argument that pools don’t have the capacity to do any more, but for the reasons given above my view is that now is the time.  If six teams are built for a single asset class, it will be much more difficult to dismantle them in the future.

Let me take passive equities as one example.  This is a highly commoditised product, where scale is imperative to drive fees down to those of the private sector.  Not all pools have yet set up passive products.  All six should be collaborating round one product, and they should be doing it now.

At the other end of the scale, private markets require specialist expertise and skills.  The performance spread between good and bad managers, almost non-existent in passive equities, is large.  Scale is needed, but for a different reason:  to afford top quartile internal managers and thereby save external fees.  Partner fund allocations should coalesce round those pools who are able to attract good teams and deliver performance.

In the interests of their partner funds, pool Boards need to address this very real problem soon.