[PPT] - PROGRESS UPDATE Joanne Segars Chair, LGPS Central Ltd. June 29th PowerPoint Presentation

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LGPS CENTRAL Ltd.

PROGRESS UPDATE

Joanne Segars Chair, LGPS Central Ltd. June 29th 2018

LGPS Central Limited is authorised and regulated by the Financial Conduct Authority. Registered in England. Registered No: 10425159. Registered Office: Floor 5 Mander House, Wolverhampton, WV1 3NB.

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ACHIEVEMENTS TO DATE

Benefits of scale (at least £25bn in assets)

2

FCA approval
Authorised Contractual Scheme approval
Went “Live” on 3rd April 2018
£5.5bn ACS under management
£6.5bn Segregated funds under management

LGPS Central Limited is authorised and regulated by the Financial Conduct Authority. Registered in England. Registered No: 10425159. Registered Office: Floor 5 Mander House, Wolverhampton, WV1 3NB.

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RECRUITMENT UPDATE

3

43 roles filled
Staff target of 65
Head of HR & Business Services has now started
Currently recruiting Investment Director, Equities

LGPS Central Limited is authorised and regulated by the Financial Conduct

Authority. Registered in England. Registered No: 10425159. Registered Office: Floor 5

Mander House, Wolverhampton, WV1 3NB.

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LGPS Central Limited is authorised and regulated by the Financial Conduct

Authority. Registered in England. Registered No: 10425159. Registered Office: Floor 5

Mander House, Wolverhampton, WV1 3NB.

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INVESTMENT UPDATE

LGPS Central Limited is authorised and regulated by the Financial Conduct

Authority. Registered in England. Registered No: 10425159. Registered Office: Floor 5

Mander House, Wolverhampton, WV1 3NB.

Work on product development, in close collaboration with our

Partner Funds, continues

Emphasis on cost reduction, investment performance and

responsible investment & engagement

Monthly client reporting is operational
Planned expansion of investment team is scheduled with the

recruitment of Senior Portfolio Managers

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ENGAGEMENT

LGPS Central Limited is authorised and regulated by the Financial Conduct

Authority. Registered in England. Registered No: 10425159. Registered Office: Floor 5

Mander House, Wolverhampton, WV1 3NB.

Engagement activity between LGPS Ltd, Partner Funds and

Stakeholders is a high priority

Both traditional and digital forms of engagement will be

used to improve communications

The Company is taking a collaborative approach to

working with Partner Funds and Stakeholders

Exercise is currently underway to listen to groups and

individuals and learn how the Company can best engage

n both a one-to-one and collective basis

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KEY DELIVERABLES 2018/19

LGPS Central Limited is authorised and regulated by the Financial Conduct

Authority. Registered in England. Registered No: 10425159. Registered Office: Floor 5

Mander House, Wolverhampton, WV1 3NB.

Delivery within budget
Design and delivery of cost saving model
Design and delivery of investment performance monitoring model
Delivery of the Company’s Responsible Investment & Engagement Policy
Completion of Target Organisational Structure
Completion of Target Operating Model
Creation of Client Servicing and Shareholder Engagement Plans
Product Development and Delivery plans for 18/ 19 and 20/ 21
Design and delivery of the Compliance Framework, Compliance Monitoring

Plan, Risk Framework and Risk Monitoring Suite

Design and Delivery of Company Handbook

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LGPS CENTRAL POOL

PRODUCT DEVELOPMENT AND ASSET TRANSITION PLAN

Rachel Brothwood Director of Pensions, WMPF Joanne Segars Chair, LGPS Central Ltd June 29th 2018

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GOVERNMENT CRITERIA

Benefits of scale (at least £25bn in assets) Strong governance and decision making Reduced costs and excellent value for money An improved capacity and capability to invest in infrastructure

1 2 3 4

PRODUCT DEVELOPMENT AND ASSET TRANSITION PLAN 2

“…all Funds must fully participate in a pool..” “...all pools must have an FCA authorised operator…” “…with minimal exceptions where there is a value for money case, …[funds] must delegate manager selection to the operator…”

Marcus Jones MP, former Minister for Local Government, letter of August ‘17

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REGULATORY BUSINESS PLAN

Phased launch of ACS sub-funds
Other collective investment

vehicles where ACS not viable

Advice and expertise, assisting

Partner Fund management of assets ahead of transition

Projected aggregate savings in

excess of £250 million over 16 years

PRODUCT DEVELOPMENT AND ASSET TRANSITION PLAN 3

In partnership with the Company, LGPS Central Ltd, providing solutions to enhance implementation of investment strategy, at reduced cost

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SUB-FUND & SERVICE CRITERIA

Meeting Funds’ strategic asset allocation needs
Significant scope of cost savings
Substantial scale (AUM)
Resources and systems in place
Clarity on vehicle structure essential to

to enable delivery

Robust value for money “test”
Efficient delivery, potentially in partnership
r cross-pool

PRODUCT DEVELOPMENT AND ASSET TRANSITION PLAN 4

Developing the right products and the commitment of Partner Fund assets are critical to delivery of the projected savings

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OUTLOOK FOR FUND LAUNCH

PRODUCT DEVELOPMENT AND ASSET TRANSITION PLAN 5

LGPS Central Sub-Fund Participation (potential) LGPSC Sub-Fund Internal/ external ACS/Alt Structure

Cheshire Derby Leics Notts Shrop Staffs West Mids Worcs

WMITA

Global equities E ACS Emerging market equities E ACS Corporate bonds E ACS UK internal active equities I ACS Global internal active equities I ACS Private equity I/E Alt Factor-based equity fund I ACS

Outcome of “recalibration” and more detailed planning for launch
Other sub-funds in development pipeline including multi-asset credit and infrastructure fund
Investment through ACS, projected to increase over £13bn during first year

Anticipated pipeline for 2018/19

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PRODUCT DEVELOPMENT CYCLE

PRODUCT DEVELOPMENT AND ASSET TRANSITION PLAN 6

Investment Committee ideas Head of Client Services Partner Fund ideas Product delivery Product Development Plan Practitioners Advisory Forum

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IMPLEMENTATION

PRODUCT DEVELOPMENT AND ASSET TRANSITION PLAN 7

LGPS Central Sub-Fund Launch Timeline

PFs &

LGPSC identify strategic needs for a new sub-fund

Product design
Resource

planning

Business

case

Costs &

savings

Product Planning 1-2 months Procurement for External Mandates Legal, FCA and Operational Readiness Product Delivery 3-5 months 2-3 months 1-2 months

Planning Procure- ment

Timeline for sub-fund launches – internal ACS approx. 4 months, external ACS and alternative structures 8 months +

Final

mandate agreed

PQQ & ITT
Due diligence on

shortlisted providers

PAF-dedicated

liaison groups

Providers selected
Pricing structures

agreed with PFs

Outcomes

presented to PFs Sub- fund

Legal work

& prospectus development

FCA approval

process

Preparations for

launch with ACS provider

Close out final issues

with PFs

Assessment of costs
Committee

approvals

Transition

manager appointment Delivery

Sub-fund

information days

Custody

transition arrangements & paperwork

Commitment

to AUM

PF resource

and engagement

Sub-fund

launch

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SUMMARY

PRODUCT DEVELOPMENT AND ASSET TRANSITION PLAN 8

Collaborative approach to development
Focused on delivery of cost savings, prioritised to meet fund

requirements

Work ongoing to develop vehicle structure and mandates
plan will continue to evolve
Pace of development and scale of commitments will impact

realised cost savings

Requires all parties to dedicate time and resources to enable

successful development and launch

Support through discretionary and advisory management

agreements available in the interim

LGPS Central Limited is authorised and regulated by the Financial Conduct Authority. Registered in England. Registered No: 10425159. Registered Office: Mander House, Mander Centre, Wolverhampton, WV1 3NB

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g y

The Future of the LGPS

Central Pool Joint Committee - Training Day

The Local Government Pension Scheme

Everything you need to know!

Bob Holloway Pensions Secretary Scheme Advisory Board

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The Agenda…………………..

Pooling
Setting the scene
Austerity and Brexit
2016 valuation
Cost Control
Investment regulations
MIFID II
Cost Transparency
Data Quality
SAB workstreams
Questions

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Pooling

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Pooling

Why?
Rationale?
Aspiration
Methodology
Who does what
Timeframe
Break-even
Infrastructure
Life after transition

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Facts about the scheme

Scheme expenditure
£11.8 billion
Expenditure on benefits
£9.5 billion
Total scheme income
£14.7 billion
Employer contributions
£7.4 billion (50%)
Employee contributions
£2.1 billion (14%)
Investment income, etc
£5.2 billion (27%)
Market value of funds
£259 billion
Total scheme members
5.6 million
Active members
2.0 million
Deferred members
2.0 million
Pensioner members
1.6 million
Total administration cost
£1.03 billion
Investment costs
£866 million
Administration costs
£169 million

(Source – MHCLG SF3 statistical return 2016/17)

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You are not alone!

Parliament* HM Government ONS MHCLG LGPS Advisory Board LGPS Administering Authorities LGPS Employers LGPS Members HM Treasury GAD Actuaries Custodians Asset Managers External Auditors CIPFA DWP TPR Other bodies Asset Pools Local Pension Boards

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The situation in Government

Queen’s speech – Brexit to dominate
Minority government – contentious legislation may be

abandoned

Existing difficulties
LGPS regulatory changes likely to be hard fought!
Impacts?
Fair Deal – fresh consultation promised
Exit payment reform
The Brewster and Walker judgments
General upkeep of regulations – foot on the brake!

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2016 funding valuation

Largely a good news story…

2013 2016 Change Assets £180.5bn £216.4bn +£35.9bn Liabilities £227.3bn £253.6bn +£26.3bn Funding ratio 79.4% 85.3% +5.9% Primary contribution rate 16.6% 17.2% +0.6%

2019 ??????????

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Cost Management

Why manage scheme costs?
Twin process – HM Treasury + SAB
The HM Treasury arrangement
The SAB process
Interaction between the two arrangements
No impact on local valuations/employer rates
Investment factors excluded

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Cost control – the targets

19.5% OVERALL

EMPLOYER EMPLOYEE

15.3 %

EMPLOYER

SAB PROCESS HMT PROCESS

6.5% 13%

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STATUTORY INSTRUMENTS 2016 No. 946 PUBLIC SERVICE PENSIONS, ENGLAND AND WALES The Local Government Pension Scheme (Management and Investment of Funds) Regulations 2016 Made - - - -----------------------21st September 2016 Laid before Parliament ----- 23rd September 2016 Coming into force - - - - - - - - - 1st November 2016

New Investment Regulations

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New Investment Regulations

What’s in, what’s out
Power of Direction (“the intervention power”)
Investment Strategy Statement
The role of new statutory guidance
Judicial review finds against MHCLG – MHCLG appeals!
Who makes investment decisions?
Non financial factors in decision making

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Responsible Investment

Fiduciary duty
The legal vacuum
Law Commission’s recommendations
Financial and Non-Financial considerations
The “twin test”
Significant financial detriment to the fund
Scheme member support
MHCLG statutory guidance
Government consultation on Responsible Investment
SAB guidance to follow in Summer 2018

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MIFID II

Markets in Financial Instruments Directive
Protection against miselling of financial services
Retail v Professional clients
LGPS funds currently treated as professional clients
Not all local authorities behave themselves!
MIFID II = more protection for local authorities
LGPS funds to be treated as retail clients
Facility for fund managers to opt up retail clients
Quantitative and Qualitative tests
MIFID II took effect in January 2018
Can funds afford not to opt up?

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Cost transparency is here…

So far…

40 investment managers have signed up

representing about 60% of scheme assets

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Data Quality

Poor data costs – big money!
Actuaries will always err on the prudent side
Pensions based on guestimates, incomplete data
Pensions Regulator is on the case!
Better awareness and education
Backed up by legislation?
Difficult with scarce resources
Data cleansing tools
Spend to save

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Scheme advisory board workstreams

Academies
Third Tier Employers
Surveys
Ill-Health Review

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Academies and 3rd Tier Employers’ Projects

Hybrid scheme – LA (500) and Non LA employers (14,000)
Many private sector and quasi private sector employers
Concerns about orphan liabilities left with LGPS funds
Concerns about poor administration and data quality
Concerns about unfair contribution rates
Concerns about appropriate exit strategies
Two scheme advisory board projects
Recommendations to MHCLG Ministers
Non statutory, statutory and extra statutory options.

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50/50 Survey

Savings reflected in cost management arrangement (0.7%)
Based on 10% take up rate
Actual take up rate less than 1%
Creates a cost pressure (0.7%)
High proportion of high earners
Poor communication a major factor
SAB approves a programme to raise awareness of the option
Balance between awareness and encouragement

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Local Pension Board Survey

Boards to be established by 1st April 2015
Two years on – need to test compliance and effectiveness
Survey conducted between May and September 2017
High levels of compliance
But how high is the bar?
Are two meetings a year sufficient?
Is a board of four sufficient?
How do we achieve consistent best practice?
Results to be published shortly
Option to make recommendations to MHCLG Ministers

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The information contained in these slides has been prepared by the LGPC Secretariat, a part of the Local Government Association (LGA). It represents the views of the Secretariat, based on our current understanding of the law. It should not be treated as a complete and authoritative statement of the law. Readers may wish, or will need, to take their own legal advice on the interpretation of any particular piece of legislation. No responsibility whatsoever will be assumed by the LGPC Secretariat or the LGA for any direct or consequential loss, financial or otherwise, damage or inconvenience, or any other

bligation or liability incurred by readers relying on information

contained in these slides.

Disclaimer

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FOR PROFESSIONAL CLIENTS ONLY

LGPS Central Limited

Responsible Investment and Engagement Update

Michael Marshall

Director of Responsible Investment & Engagement