Local Government Pension Scheme: 8 reasons to consider employer-specific investment strategies

Things are changing for the LGPS.

Not only have market conditions changed significantly, creating surpluses that need protecting, there is also much focus on consolidation including having far fewer schemes.

Could employer-specific strategies help address both of these changes – by providing better risk management for funds and facilitate future mergers? We set out 8 clear reasons for considering employer-specific investment strategies below (together with supporting notes).

There are some potential disadvantages. The main one is the extra complexity. However, the cost of implementing and running employer-specific strategies is small in relation to the size of scheme assets, especially if they merge. Some schemes already have employer-specific investment strategies and so we assume it can be done or otherwise the appropriate regulatory changes will be made.

Supporting notes

Traditionally each LGPS fund has had a single investment strategy, which applies to every employer.  This remains the case with a few exceptions. Less that 10% of LGPS funds offer their employers any alternatives and when they do it tends to be a single low-risk fund (made up of gilts and high quality corporate bonds).  There are a couple of examples of employers having bespoke investment strategies designed to meet their objectives and their liability profile.

The LGPS is both notionally segregated and “last-employer-standing”.  Each employer has its own notionally identified assets, which reflect their own contributions and liability cashflows. They are attributed a share of the investment returns of the investments they are invested in, normally alongside all other employers in the same LGPS fund.

In order to apply an employer-specific investment strategy (instigated by the fund or at the request of an employer), the investment returns need to be attributed appropriately according to the asset allocation. This is an operational challenge, but it follows the principals of notional segregation. Some funds have formally unitised their assets to allow more effective asset allocation, which should make employer-specific investment strategies more straightforward.

Despite some funds having done this already, some funds and advisers remain sceptical of the legality of having employer-specific investment strategies.

Employers such as universities and housing associations for example have become very aware of their surplus position as a result of their accounting positions improving very significantly. Many have approached their funds to see what the options are. Some funds are philosophically wedded to a single investment strategy. Others recognise the need, but are not able to respond quickly, with a common response that this will be considered at the next actuarial valuation, which will not be resolved for nearly two years. A few are responding to recent market conditions, for example the recent news that Cornwall Pension Fund is considering a medium and low risk strategy alongside their main strategy.