Minutes:
Mr Mike O’Donnell (LCIV Chief Executive Officer) and Mr Kevin Cullen (LCIV Client Relations Director) attended to update on a number of LCIV matters and respond to questions/comments. A printed slide presentation handed to Members formed the basis of LCIV commentary.
Assets to the value of £18bn are now under LCIV oversight, including Legal and General Investment Management (LGIM) funds and Blackrock passive funds. LCIV also have 14 active sub-funds and the presentation reported that over 50% of London’s assets are now pooled. A Quarter 2 London Local Authorities (LLA) Investment Forum would also take place on 6th June 2019 and consultation is in progress concerning a Service Level Agreement (SLA) with each LLA. An organisation chart for the LCIV outlined a current staffing structure including details of vacant posts.
The presentation also outlined the LCIV’s governance structure and oversight arrangements. The LCIV Board provides independent oversight acting in the interest of all LCIV shareholders (comprising three executive and seven independent non-executive directors and one independent chair). External independent oversight is provided by: the Financial Conduct Authority (approving persons, permissions for business and prospectus approval); the Depositary (providing independent oversight of assets to protect investors’ interests); and Auditors (auditing the LCIV company and ACS pooling vehicle). Government oversight is provided by the Ministry of Housing, Communities and Local Government (looking at progress against pooling criteria).
Details of the current LCIV fund offering were also provided. These comprised a fund for UK equities, six funds for global equities, a fund for emerging market equities, four multi-asset funds, and two fixed income funds. Total Assets under Management (AUM) for the funds amounted to £8.2bn. Details were also provided of a further 14 fund products being planned for launch and their progress. Future launch of four of the products (Private Equity, Global Equity Blend, Active Credit Blend and UK Credit) is subject to demand in the selected strategy.
Starting his presentation, Mr O’Donnell congratulated L B Bromley on achieving its nationally recognised performance awards. Mr O’Donnell had completed just over two months as CEO with previous experience including Director level finance responsibility in Local Government and previous involvement in establishing the LCIV.
The LCIV aimed to add value to London boroughs and help boroughs meet their pooling requirements. With pooling mandatory, Mr O’Donnell looked to help facilitate a response to the requirement.
New LCIV governance arrangements were introduced last autumn in response to the earlier Willis Towers Watson review of LCIV governance and Mr O’Donnell outlined the LCIV’s position on matters of concern for L B Bromley.
Remuneration Policy
This is being reviewed by the LCIV and a number of boroughs are concerned about LGPS provision for LCIV staff. Ongoing LGPS membership will be looked at and Mr O’Donnell referred to pension fund options. New joiners subsequently promoted to salaries over £120k will not be entitled to LGPS membership; it is necessary to bring forward the review and report to the LCIV Shareholders Committee this summer.
LCIV Chair
The term of the current Chair, Lord Kerslake, will end in September 2019. Any decision on continued appointment will need to be endorsed at the LCIV Annual General Meeting (AGM) this summer.
Broader Permissions
A decision had been taken at the 31st January AGM for the LCIV’s ‘business purpose definition’ to be amended so the LCIV can have broader permissions. Originally, the LCIV was an FCA authorised operator of an ACS but is now defined as the FCA authorised company to provide a collaborative platform through which the Administering Authorities of the LGPS funds can aggregate their pension monies and other investments. Management of funds will provide the LCIV with flexibility for all London boroughs and arrangements can be set up for funds. Authorisation was given at the AGM to ask shareholders to sign a letter confirming approval to amend the Shareholder Agreement to reflect the LCIV’s amended business purpose definition.
Business Planning
Work with the Shareholders Committee would start soon on the medium term business model and decision making would take place later in the year. Overall, over 50% of London’s assets are now pooled; by 2020 (following actuarial valuations), 95% of the value of a pool member’s assets (at the point of investment) was expected by the Ministry of Housing and Local Government (MHLG) to be invested via a pool for revised strategies, with new investments outside only made in very limited circumstances. For all concerned with the LCIV pool, the question is what a sensible target and shared transition plan across London should look like.
Chief Investment Officer (CIO) appointment
Although the CIO post has been vacant for some time, the LCIV are now close to an appointment. In the meantime, an interim CIO started the previous week.
Governance
The LCIV is due to review its governance after 12 months of the new arrangements. This will be started by the Shareholder Committee considering the matter at its June meeting. The LCIV aim to provide good fund officers and deliver investment needs - the LCIV can deliver scale and invest in different areas e.g. infrastructure.
On custodianship, the cost per fund will vary, the LCIV using Northern Trust for custody. A number of boroughs have tendered for custodian services on non-pooled funds. Although the level of non-pooled investment is reducing, Northern Trust (through the LCIV) offers a low custodian rate for authorities with investments outside of the LCIV. Reference was made to the extra cost of custodianship fees in using the LCIV and LCIV advised that they would provide more details of the Northern Trust offer in this area.
Referring to consultation on statutory guidance for asset pooling, the Chairman highlighted the Government’s intention for at least 95% of a Fund’s assets to be invested through a pool. The Chairman felt the Government had not grasped the difficulties involved with this.
On performance, although there might be advantages in larger funds (e.g. lower fees), the Chairman indicated that smaller funds are better performing. He also felt there is little the LCIV can do to benefit L B Bromley’s good performance; the performance of other boroughs in the LCIV will improve through benefiting from L B Bromley’s performance.
The Chairman also highlighted his preference for the LCIV Chairman position to be appointed by competition for the next term. Another Member was concerned that the current LCIV Chairman might be automatically appointed. The Chairman’s performance, he felt, has been poor and his position should have been re-considered following the Willis Towers Watson report; the process for appointment needs to be fair and independent.
The Member also suggested that the LCIV has moved away from its core mission, widening its scope. He likened Bromley’s position to having a self-select ISA where services provided by an adviser are not wanted. However,
It seemed that L B Bromley is being intimidated into taking a course when its Fund is already performing well. He felt the LCIV should provide a passive offering and an active offering - the active element being available for poorer performing authorities with the passive element provided for L B Bromley.
Additionally, he felt that LCIV staff should not be LGPS members. However, the Chairman referred a salary cap (£120k) being in place above which LCIV staff are not eligible for LGPS membership; the LGPS membership part of the remuneration review has also been brought forward by the Chief Executive.
In considering any transfer from Bromley’s Baillie Gifford Global Equities to the near identical Baillie Gifford fund held by the LCIV, the Chairman highlighted that fee savings via the LCIV’s fund are not materialised for some six to ten years following transfer (given considerations such as legal costs, membership fee of the LCIV etc.). As such, he felt the benefits are too far into the future and L B Bromley is looking for something better. The Chairman also understood that the LCIV had negotiated standard rate fees for its Baillie Gifford product and there appeared to be no negotiation to reduce fees further.
Responding to the above points Mr Cullen made a number of comments including those summarised below.
· Concern about widening of scope was understood but Mr Cullen was not sure there has been much of this.
· The LCIV set up funds within the parameters of the ACS as it originally set out to do. It is not for the LCIV to force boroughs to invest via its pool but in the context of Government pooling requirements it is necessary to satisfy risks of not doing so.
· A wider offer from the LCIV and change in the LCIV’s business purpose would be for those boroughs who want to benefit from it. On options to invest, the LCIV generally offer active assets. The LCIV have a range of funds available and if it is necessary for L B Bromley to change its strategy the LCIV can offer products.
· Investment in the LCIV’s Baillie Gifford product (global equities) does produce an immediate saving and the LCIV hoped to do some work on increasing the fee saving. Although the LCIV can offer a large scale fee saving, Mr Cullen hoped the LCIV can go further and he referred to savings in direct fees.
If investing through the LCIV, a question was asked on why it is necessary for L B Bromley to pay for add-ons that are not wanted. In such circumstances, L B Bromley should be able to opt for a passive approach and a “pay as you go” arrangement. Instead, it seemed the LCIV has a “one size fits all” approach; if it is necessary to spend £1bn through the LCIV, the client should expect a bespoke arrangement in line with the client’s preference. Such an approach had not been developed - the LCIV seemingly having a top-down, monolithic approach.
Mr Cullen referred to the LCIV requesting a service fee and finance development fee - a decision for this being taken at the start of the LCIV so it could be established and running. Should L B Bromley not wish to invest in infrastructure it is not necessary to pay for that element. Some initial funding is necessary to develop the LCIV.
In further discussion, reference was made to the Council’s duty to its residents. Referring to awards recently afforded the Council for its Fund performance, a Member indicated that L B Bromley would not be so persistent in its approach if it is not a high performing fund. He also noted that the LCIV still has a number of vacancies. Concerning scope widening, he heard at a previous meeting that the LCIV was applying for a dealer’s licence and he sought a view on future LCIV direction.
Mr Cullen referred to pooling being driven by Government guidance needing all authorities to pool. There is sufficient flexibility not to go into a pool and the LCIV is not saying to boroughs they must pool. Instead, the LCIV is established to meet borough pooling requirements as they emerge. It looked to increase Assets Under Management (AUM) beyond 50%. The “Lift and Shift” phase has been slow and the fund launch programme needed to be more effective. It is open to question whether there are also options to work with other pools and it will be necessary to meet in this regard.
Concerning LCIV vacancies, approval has been given to employ up to 35 staff but this is not to say 35 staff will be employed. A priority is to fill current vacancies. The LCIV has a model of everyday and project type work with a business model for this on a more flexible resourcing arrangement. This would be looked at under the Medium Term Financial Strategy (MTFS).
The Chairman was aware that other boroughs are also yet to pool and he asked why this was the case. Mr Cullen explained that there are various reasons. He indicated that one borough should start pooling in the next six months with another following closely behind. However, there is no movement with two other boroughs. Often it is a case of where a Fund’s investments are.
A Member highlighted that the L B Bromley Fund can change a Manager when needing to do so but understood this would not be the case in the LCIV. Should the LCIV change and it became necessary to move assets, there would again be less authority/flexibility for L B Bromley to do so i.e. less opportunity for response. He suggested that L B Bromley’s circumstances should be reflected in the MTFS investment approach. He also enquired of other assets that might be envisaged for the LCIV.
Additionally, the Member asked whether the current CIO appointment is interim and further enquired of the Chief of Staff role. In regard to the LCIV’s current fund offering he asked whether the LCIV is planning to take on portfolio management for the funds; he also asked for details of any extra costs there might be (in this scenario) and how these might affect fee savings.
Mr Cullen indicated that there are no plans as yet to move assets around – this needed to be looked at by way of specific proposals. There are also no plans for direct management of assets which are all to be undertaken by Fund Managers. However, having 32 Funds in the LCIV, all undertaking investment in different ways, would undermine the benefit of the pool. There needs to be an element of coming together of approaches as an inevitable consequence of pooling. The LCIV is happy to send its product design to boroughs each quarter; however, it is not possible to build 32 different flavours in pooling as it will defeat the objective. Some compromise will be needed by boroughs and collaboration is key.
Responding to a further question, Mr Cullen indicated that costs associated with “Lift and Shift” (e.g. Stamp Duty) depend upon the asset class and the Director felt that the LCIV should assist boroughs in dealing with taxation for any transfer of investments. Rather than each borough have its own adviser and costs, one taxation adviser is best. Mr Cullen advised that the LCIV cannot co-ordinate transition; the LCIV can make more cost savings but need permissions to do so.
Members were also advised that the top borough for AUM with the LCIV is L B Bexley (active funds at 60%). Other boroughs behind L B Bexley are: L B Havering; L B Tower Hamlets; City of Westminster; L B Lambeth; and L B Merton.
The Chairman thanked Mr O’Donnell and Mr Cullen for attending.