LGPS Central Pool Joint Committee Overview

Providing a comprehensive overview of the LGPS Central Pool Joint Committee in February 2020, including discussions on evolving guidance and regulation, market conditions, strategic asset allocation, and future priorities. The recap of the scheme's annual report highlights membership growth, assets under management, and upcoming strategy reviews. Contextual insights into responsible investment, cost management, and governance issues are also covered, along with market trends and strategic asset allocation considerations based on the current investment strategy. Looking ahead, the agenda is likely to be dominated by investment pooling and other regulatory codes impacting the pension fund landscape.

• LGPS
• Central Pool
• Joint Committee
• Pension Fund
• Strategy

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1. LGPS CENTRAL POOL JOINT COMMITTEE BIRD S-EYE VIEW February 2020 Rachel Brothwood Director of Pensions, West Midlands Pension Fund

2. OVERVIEW Recap Central pool within the LGPS Evolving guidance and regulation Market backdrop Strategic asset allocation Aspiration for pooled investments Cost base and drivers for change Looking ahead 1 119

3. RECAP SCHEME ANNUAL REPORT LOCAL STRATEGY REVIEW 2018 2013 % change Central Pool Membership Employers Assets under management 5.8 million 14,800 275 billion 4.8 million 9,340 180 billion +21% +58% +53% 1 million 2,300 45 billion Individual Fund strategy reviews to complete by 31 March 2020 Reset of employer contribution rates and funding strategy Confirm headline strategic asset allocation targets and ranges Inform ongoing work on pool product development Not expected to materially change short terms priorities 22019

4. CONTEXT OF EVOLVING GUIDANCE AND REGULATION Responsible Investment McCloud & Cost Management CMA review Adviser objectives Good governance review New Pensions Regulator codes Investment pooling Likely to dominate agenda for 2020/21 32019

5. MARKET BACKDROP 2019 another strong year for Global Equity markets UK lagging but signs of recovery Fears of recession may have subsided (for now) Fiscal stimulus (used effectively) could boost growth Inflation contained and currently below BoE target Plenty to watch out for - trade wars - US election - market shocks - spread and impact of coronavirus Uncertain outlook for investment returns remains 42019

6. STRATEGIC ASSET ALLOCATION Based on current Investment Strategy Statements for Partner Funds and broad classification Growth assets Growth assets provide main driver for return (e.g. equities) Income assets Income assets offer income yield and growth (e.g. property, infrastructure) Stabilising Stabilising assets closer match to liabilities (e.g. gilts and corporate bonds) assets provide a Individual Partner Funds use different classifications this chart is purely to illustrate the differing balance of SAA requirements Spread indicative of varying funding requirements and risk appetite 52019

7. ASPIRATION FOR POOLED INVESTMENT CAPABILITY 2020/21 9- 10bn of Partner Fund assets projected to transition to pooled funds over the next 4-5 years 2024/25 Quoted Equities MAC Private Equity EMD Property Gilts & bonds Increasing product range across asset classes, with more focus on income assets (including infrastructure) reflective of changing strategic asset allocations Quoted Equities Targeted return Private Debt Gilts & bonds Private Equity Property MAC Special opps Infrastructure EMD Source: Product Development Plan January 2020 Range of products to increase to meet strategic asset allocation requirements 6019

8. INVESTMENT COSTS AND DISCLOSURE (recap from June 2019) LGPS sheds light on investment costs Increasing cost disclosure across the LGPS - 117 managers signed code including LGPS Central Limited 1,250 1,041 1,000 Investment costs ( million) 875 805 727 750 CIPFA annual report guidance (March 2019) - New reporting on pooled assets ( , performance and cost) - Active vs passive - Transition plans and costs - Cumulative savings from pooling - Pool company and oversight costs 504 500 415 250 0 2013 2014 2015 2016 2017 2018 Source: LGPS Scheme Advisory Board Increase in reported costs with extensive data collection and reporting requirements 719

9. CENTRAL POOL COST TRANSPARENCY REVIEW Total investment management expenses (excluding transaction fees) Historic Total Expenses and TER 250 60.0 Total Expense Ratio (Bps of AUM) 50.0 200 Total Expenses ( m) 40.0 150 30.0 100 20.0 50 10.0 0 0.0 Reported 2014/15 Reported 2015/16 Reported 2016/17 Reported 2017/18 Adjusted 2017/18 Investment Management Expenses (excluding Transaction Costs) TER Source: LGPS Central pool 2019 Cost saving model Adjusted costs reflect output from CACEIS review previously reporting 93% of costs Confirms current analysis provides good base for assessing potential for cost savings 82019

10. COST DISTRIBUTION AND DRIVERS FOR CHANGE 2017/18 costs by asset class Equities Infrastructure Fixed Income Private Equity Other Alternatives Other Source: LGPS Central pool 2019 Cost saving model Property Life Policies Illiquid assets (private equity, infrastructure, property and other alternatives) make up less than 25% of assets but account for 2/3rds of cost potential for illiquidity premium in returns to offset Asset allocation and route to implementation will play a major role in individual Partner Fund investment costs 92019

11. LOOKING AHEAD Product development ongoing Expanding toolkit to meet strategic asset allocation requirements Evolving guidance and regulation may impact pace and priorities Good base against which to assess future cost saving opportunities Many moving parts 102019