The changing role of investment consultancy for the LGPS

Pooling is changing the role of investment consultancy for the Local Government Pension Scheme (LGPS) but what does this mean for your Fund?

In practice, pooling of listed assets has mostly already taken place and the April 2025 deadline will largely come and go without undue concern from an investment of listed assets point of view. 

In this blog, I’ll argue that one of the more significant areas you should be looking at in relation to pooling is your relationship with your investment consultant. And if you haven’t already started your thinking how that will be different from April 2025 onwards, now is the time to start.

Past and future: two questions to consider

1. When looking back – what has pooling already changed in investment of your Fund assets?
2. When thinking about the future – what further changes will there be to how you set investment strategy and implement it?

Given progress on pooling is well advanced, let’s break down the ‘looking back’ bit and start with the pros of investing via a pool:

• Scale provides leverage in fee negotiations.
• Due diligence on Funds is carried out centrally.
• Ongoing monitoring has a dedicated resource making it efficient.
• Reporting is more efficient and should lead to consistencies in reporting (e.g. Task Force on Climate-related Financial Disclosures (TCFD)).
• Implementing new allocations can be achieved relatively quickly, in pre-existing asset classes.

The idea behind pooling is a simple one; look to gain economies of scale and efficient Fund selection, coupled with efficient implementation of investment ideas. 

In practice - does that work? For some asset classes, yes absolutely. 

Does it work for all asset classes and all pools? Not yet (the pools are working hard to address this issue, albeit with very different approaches being taken across the pools).

Improving future outcomes

So, what’s missing, or needs to be worked on, so that you can potentially improve the investment outcomes for your Fund in future?

• Are your ‘impact aims’ the same – as those of your fellow pool participants?
• Scale may not be your friend – in more innovative or impact focused asset classes.
• Pace and opportunity – where the investment case is being driven by a particular catalyst (for example private sector schemes selling quality private market assets for liquidity reasons) how do you influence your pool to enable you to take advantage of what might be a useful but fleeting opportunity, or indeed can you?
• Where the ideas are new – or considered new to LGPS investors (for example agriculture and some other natural capital assets), does your pool have these on their radar and will they have an operational approach in time to benefit from early mover advantage, and meet the investment needs of your Fund?

Why isn’t scale your friend? 

The more assets are pooled together, the larger the investment needed to actually 'move the return needle'. For new asset classes, and for those looking to achieve specific goals around UK growth and/or social benefit, due diligence and focus on developing those assets is key. 

A long-tail of very small investments (in relative terms) means it is very difficult for that due diligence to be dedicated to all those ideas – and research suggests this often leads to the price of assets being bid up, rather than increasing access to innovative ideas or leading to better investment outcomes.

Your Fund's local aims

And of course, there’s the question of what your Fund is trying to achieve. Take whatever 'levelling up' will be known as in future, you may wish to support specific projects within your area. Pooling will inevitably move asset decision making, and impact, further away from your Fund and your members’ priorities and towards a compromise so it can potentially work for all members of the pool.

"The Fund investment strategy, delivering for your members and the fiduciary duties attaching to those, firmly remain your responsibility. They can’t be outsourced or delegated."

In summary

• Pooling works well in deep and liquid asset classes, and in areas of established alternatives and opportunities.
• Different pools have different approaches to alternative investments.
• But typically, when you’re talking about less established alternatives and the opportunities for your own specific circumstances, you should be thinking about how to make this best work for your Fund as your primary consideration – and that might not involve investment via a pool.   

What will you need from your investment consultant?

Specialism

• Support in aligning the implementation of Environmental, Social and Governance (ESG) and responsible investment with your desired impact views. Ensuring their implementation is consistent across your portfolio, with stewardship that is consistent with your beliefs. Providing an independent view on the compromises that may be needed under the pooled arrangement and how you could work with your pool to resolve these.
• Investment is about more than just what you buy for the future. It is also about what you sell to Fund these purchases. Due to the potential costs involved, this becomes especially important when thinking about the options for your alternative and private market assets. An independent view will help you achieve the best outcomes in these areas. Particularly working with a consultant that really knows the areas, understands how to put together portfolios that work together, and how a positive impact for your Fund may be achieved beyond solely return numbers.

Strategic considerations

• An unfettered, independent view of what is best for the needs of your Fund, rather than a strategy that has to take into account the commercial considerations of other interested parties. 
• Taking advantage of more creative thinking in innovative areas. For example, consideration of adopting a more granular multi-investment strategy within your Fund to suit the particular needs of your participating employers.

Investment knowledge, perspective and value

You should be working with an investment consultant who brings investment knowledge, perspective and value to the table. One who helps support and enhance you and your pool. Your investment consultant should listen to your needs, work in a constructive and collegiate manner to ensure you achieve the best investment outcomes.

What don’t you need from your consultant? Generic advice that needs to be suitable for multiple Funds’ situations, working across a range of situations and therefore have capacity for investment £500m+ in assets, potentially crowding out the opportunities for you and your Fund.

Developing the investment offering with your pool can be a win-win for all – just don’t forget what your Fund is looking to achieve, how your Fund might do that and be comfortable that your Fund is nimble enough to take advantage of the opportunities out there. 

Is that the relationship you currently have with your investment consultant?