Interview with Mike Weston

LAPF Investments talks to Mike Weston, the departing CEO of LGPS Central, about his views on the progress and future of Asset Pooling, and highlights of his time at LGPS Central

Why do you feel now is the right time to step down from your role at LGPS Central?
It is five years since pooling started and LGPS Central passed its five-year anniversary on April 3rd. Having significantly developed and grown the business since I arrived, I have made my contribution. It is time for a successor to take on the next phase of pooling.

The Chancellor indicated his preferred direction of travel in the spring budget when he referred to moving further and faster with fewer larger pools. But there is also a forthcoming general election and uncertainty over how high further reform of LGPS will be on the agenda of whichever party or coalition is in power once voting is complete.

There is still a great opportunity within LGPS pooling. How that opportunity might be realised over the next five years is much less certain.

Is LGPS asset pooling at the stage now you thought it would be when you took the helm at LGPS Central four years ago?
No. Pool companies have not been able to advance as far or as quickly as I had hoped when I joined Central early in 2019.

Looking back, it is clear to me that a major factor has been the initial focus by government on the pooling of scheme assets, while doing little to evolve the underlying governance arrangements of the LGPS. Investment activities have begun to consolidate, but there have been no changes to governance structures.

The potential value-add from regular collaborative tripartite working between pool companies, partner funds and their advisers, and from pool company participation in strategic asset allocation discussions, remain the exception rather than the norm. Asset pooling, and the pool companies, is essentially an investment implementation mechanism.

Outside of the LGPS, DB pension schemes are increasingly embracing OCIO/fiduciary management as their investment implementation mechanism of choice, delivered by bigger, better resourced private sector suppliers with more established systems, processes and investment track records.

The second critical factor slowing progress is the lack of “ownership value” attached by partner funds to their stakes in pool companies. Currently, value is typically assessed simply in terms of investment performance and costs. These are both very important but they are not the only elements of ownership value: for example, Responsible Investment and Engagement leadership, improved investment governance, complete fund/PoolCo alignment of interests should also be considered. With clarity around the definition of ownership value, pool company business strategies could be developed to maximise delivery of that value.

What have been your highlights and lowlights during the past four years?
LGPS Central is undoubtedly a more client focused, professional and larger company than when I joined. I thoroughly enjoyed my time leading it and working with the great people in Wolverhampton. My highlights would be:

• More than doubling the scale of the business to c.£30 billion AuM, over 80 people and 27 investment funds across the waterfront of both public and private asset classes to meet partner fund strategic asset allocation needs.
• Building a leading RI&E team which adds investment value by engaging with companies and client value with Net Zero, TCFD, Climate Risk Reporting and Stewardship Code accreditation.
• Achieving cumulative break-even; total cost savings are now larger than all the costs of establishing and operating LGPS Central since the pooling initiative began.
• Establishing a graduate recruitment programme, now in its third year, to bring talented and diverse young people into the business.

My lowlight is simply the opportunity costs still being paid by LGPS members and sponsoring employers (and ultimately us all as taxpayers) because pooling has not advanced as far and as fast as it could have done.

How impactful has the continued government delay of LGPS consultation been on the progress on asset pooling?
Very significant. The uncertainty around when the consultation might arrive and what it might contain has definitely delayed decision making within partner funds and pool companies.

Should local authority pension funds be able to choose which asset pool they are members of?
This could be one alternative evolution of pooling, and would be a positive catalyst for change. Perhaps a single date could be set for all 86 LGPS funds to decide using a single transferable vote which pool they wished to belong to – in effect a general election for pooling. Reverting to a pre-2018 would not be an option, but inclusion of the option to use an external OCIO/fiduciary manager could be. In advance of the election there would need to be a period of canvassing to allow pool companies to “sell” themselves to each LGPS fund. My prediction is that the result would be a smaller number of bigger pool companies populated by pooling enthusiast LGPS funds. Pooling sceptic funds would be more likely to vote for individual private sector fiduciary management solutions.

There would inevitably be significant practical difficulties implementing such a plan, but it would mark a real step forward.

The recent budget alluded to moving towards a smaller number of pools (in excess of £50 billion) to optimise benefits of scale. What do you think the future of LGPS asset pooling will look like?
In ten years’ time I believe there will almost certainly be fewer than eight pool companies and 86 LGPS funds. In the shorter term, consolidation is less predictable. Three super-pools, each with over £100 billion of assets would be a good target to capture more economies of scale. A single £400 billion pool would be even better, and still not be so large that diseconomies begin to appear.

Globally, asset pooling is very mature. What lessons can be learnt and where do you look to for inspiration around the world?
In 2021, a group of LGPS pool companies commissioned research into exactly this question. The project looked at pooled public pension schemes in North America, Europe and Australasia. All confirmed that there are meaningful benefits of scale from pooling, and that, critically, they are realisable. Four characteristics were identified for long-term success – defined as better investment returns after costs compared to a benchmark established by stakeholders.

• Contemporary governance. Establishment of clear divisions of responsibilities, and simplified, flexible decision-making including effective delegations to specialists trusted to exercise sound judgement over the long-term.
• Professional management. Competing for, hiring, and retaining the “right” people for key positions to, among other things, implement long-term investment strategy while building trust and confidence among stakeholders.
• Long-term strategic planning and implementation. An agreed long-term strategic asset allocation reviewed annually or less frequently, with the pool afforded wide ranges to implement and operate within.
• Firm regulation. Benefits of scale can be accelerated such as through legislation mandating or encouraging consolidation and pooling, helping manage structural impediments and conflicts.

What three words sum up LGPS asset pooling and why?
More Consolidation Needed. After five years there is still the opportunity for a further 50% of total LGPS scheme assets to transition into pooling. And fewer, larger, pools would be able to capture more of that opportunity value for the benefit of LGPS members.

Finally, what next for Mike Weston? A new challenge within, or outside the LGPS?
A new challenge definitely. I am energised by working with committed colleagues to devise creative solutions for client needs or business development opportunities. This may be within the LGPS or back in the private sector asset owner, asset manager or asset advisor space. For now though, I am enjoying the summer.