Project Brunel Presentation

26th February 2016

Investment Pooling

Local Government Pension Scheme pooled investments –

The government will work with Local Government Pension

Scheme administering authorities to ensure that they pool

investments to significantly reduce costs, while maintaining

overall investment performance. The government will invite

local authorities to come forward with their own proposals to

meet common criteria for delivering savings. A consultation

to be published later this year will set out those detailed

criteria as well as backstop legislation which will ensure that

those administering authorities that do not come forward

with sufficiently ambitious proposals are required to pool

investments.

July Budget Statement:

Government Timetable

Date Requirement

19th February

Initial submission:

• Should include a commitment to pooling.

• A description of progress towards formalising their arrangements with other authorities.

• Can be joint with pool or an individual submission.

15th July

Detailed submission: • For each pool, a joint proposal setting out detail

of governance structures, decision-making processes and implementation timetable.

• For each authority, an individual return detailing commitment to, and expectations of, the pool, including profile of costs and savings, the transition profile for their assets, and rationale for any assets they intend to hold outside of the pool in the long term.

Government Criteria

Issue Description Summary of Requirements

A. Scale of assets under management

• The size of pool once fully operational, and its legal type.

• Assets outside of pool and rationale.

• Internal work and services to be hired.

• Timetable for establishment and asset transition.

B.

Strong governance and decision making

• Accountability between pool and elected members, external scrutiny.

• Mechanisms for Authorities to hold pool to account.

• The process for decision making at all stages of investment.

• Resourcing

• Net performance publication, benchmark usage.

Government Criteria

Issue Description Summary of Requirements

C. Substantial cost savings

• An estimate of investment costs for the year to 31 March 2013 and the current level investment costs.

• Detail on cost savings over 15 years.

• Estimate of implementation and transition costs.

• Proposals for reporting against forecasts.

D. Improved infrastructure capability

• The existing proportion of Fund allocated to infrastructure.

• Proposals to acquire capacity and capability to assess infrastructure projects with reduced costs via pooling.

• Future proportion of Fund to be allocated and how derived.

Current Pooling Proposals

Brunel Pool

Brunel Timetable

Item Date

Project Brunel appoints financial and legal advisors August 2015

Options feasibility report (PwC) September 2015

Development of governance and business case models (PwC) October to December 2015

Work on new Sub-Fund requirements (Fund representatives) Ongoing

Meeting of Committee Chairs and feedback from Funds 7 January 2016

Review initial draft of proposal document for DCLG 18 January 2016

Pension Committee meetings to approve initial proposalLate January/early February

2016

Initial proposal submission to DCLG 19 February 2016

Feedback from DCLG on initial proposal March 2016?

Development of final proposal March to June 2016

Pension Committee meetings to approve final proposal Late June 2016

Final proposal submission to DCLG 15 July 2016

Legal StructureOption Description

1.

Collective Asset Pool governed by a Joint Committee

• with Oversight Group, Operations Groups and Portfolio Construction Groups

• Commercial organisation provides unitisation service

2.

Authorised Contractual Scheme (ACS)

Commercial organisation rented as ACS Operator

• The service enables Brunel people to influence investment appointments

3.

Authorised Contractual Scheme (ACS)

Commercial organisation rented as ACS Operator

• The service is fiduciary, leading on investment management appointments

4.

Authorised Contractual Scheme (ACS)

ACS Operator would be built by Brunel Founder Funds

• A longer term option, following Option 1 or 2?

Comparison between Options 1 and 2

CAP/Joint Committee ACS, rented Operator

Comparison between Options 1 and 2

CAP/Joint Committee ACS, rented OperatorChallenges, resourcing and operations

Operational simplicity

A secretariat for the IOp Joint Committee would be required. Clusters of IMAs.

The Operator would aim at simplicity. Its expertise would be available. Single IMAs.

External entity appointments

The Custodian would be required to deliver unitisation as an additional service.

The rented Operator would deliver unitisation.

Control of unit pricing policy

A pricing policy would be possible, with clarity on potentially contentious situations.

The Operator should be open to pricing policy inputs in some areas.

Retain existing experience

Extensive knowledge from investment teams required by the IOp. Keyman risk is avoidable.

Some reduction in the inputs now made by investment teams possible, depends on Operator approach.

Regulatory capital No regulatory capital required.

Regulatory capital costs likely to be included in Operator fee structures.

Pooling internally managed assets

Possible if internal staff placed in a new, FCA authorised, entity.

Possible if internal staff placed in a new, FCA authorised, entity. Operator approval also needed.

Operational cost control

Focus required on internal cost control.

Focus required on Operator costs and terms of business.

Ownership of assets Founder Funds retain legal as well as beneficial ownership.

Founder Funds retain beneficial but not legal ownership.

Investment manager procurement

OJEU processes not required for existing managers, but likely for new managers.

OJEU processes not applicable, but would still have to demonstrate value for money.

Operations

Group

Oversight

Group

Board reports to Participating

Funds on Operator performance

Recommendations

LGPS Fund

LGPS Fund

LGPS Fund

Founder Funds

LGPS Fund

LGPS Fund

LGPS Fund

LGPS Fund

LGPS Fund

• Manager selection

<-------------------------------------------------------------Investment Managers-------------------------------------------------------->

Sub-fund 1

UK Equities

Sub-fund 2

..

Sub-fund 3

…

Sub-fund …

…

Sub-fund …

..

Sub-fund …

..

Sub-fund 20

…

Each

Investment

Manager

contracts

with

individual

LGPS Funds

Administrator

Depositary(Third Party)

Global Custodian (Third Party)

Resourcing:

Pension Committee

Chairs

Resourcing:

Section 151

Officers,

Investment

Officers

Manager

selection

Unitisation

• Oversight and

ratification

Portfolio Construction

Groups

PCG 1 Growth Liquid

PCG 2 Infrastructure, other

growth, Illiquid

PCG 3 Stabilising, Liquid

PCG 4 Stabilising, Illiquid

PCG 5 LDI

Local pension board

Local

oversight Administering Authority

Pensions Committee

Investment sub-committee

Delegation

Delegation

• Funding strategy

• Asset Allocation

• Manager Selection

• MiFID II compliance

required

• Manager

appointment

• Meeting and

reporting

• Selects the range of

Sub-funds

Resourcing:

Investment Officers

Option 1: Collective Asset Pool (Joint Committee)

Portfolio Construction Groups

and Sub Funds

Growth - Illiquid

Infrastructure

Private Equity

Property

Stabilising - Liquid

Gilts

Index Linked

Corporate Bonds

Multi Asset Credit

Absolute Return Bonds

Overseas Sovereign Debt

Stabilising - Illiquid

Infrastructure Debt

Private Debt

Secured Loans Liability Driven

Investment

Growth - Liquid

Developed Equities - Core

(index + 1-2%)

Developed Equities - High Alpha

(index + 3% or more)

Emerging Market Equities

(index + 1-2%)

Frontier Market Equities

(index + 1-2%)

Sustainable Equities

(index + 1-2%)

Passive Equities

(index tracker)

Passive Equites - Smartbeta

(index +)

Multi Asset (DGF)

(cash +)

Hedge Funds

Emerging Market Debt

High Yield

Savings

Year 2026 (if transfer of

unlisted assets complete)

Option 1

(Joint Committee)

Option 2

(Rented ACS)

Option 1 vs

Option 2

Net predictable

performance savings16.0 16.0 0.0

ACS (rented) Operator

Cost- -1.9 1.9

JC Custodian

Unitisation Cost-1.1 - -1.1

Other costs including

Staffing-0.6 -0.3 -0.3

Net savings 14.3 13.8 0.5

• Aspirational target to make further savings

to achieve total savings of £60m - £70m.

Infrastructure

• Already significant commitment from

founder funds of the Brunel CAP.

• Devon Fund has a 4% target, with c. £150m

committed and c. £95m invested.

• Aspiration to support national initiatives.

• Must be the right type of investment to meet

Fund’s fiduciary duty and investment

objectives.

• Consider increase in target allocation for

July submission?