Pension schemes in England and Wales are undergoing their most radical shake up in years as new local government pension schemes (LGPS) pools put a spotlight on data management practices.
Local government pension schemes in England and Wales are undergoing their most radical shake up in years. Currently, the LGPS is organized into 89 pension funds; under the new model, these funds will be combined into eight large investment pools that will manage pools of assets up to £40Bn. One of the central aims of the reform is to reduce investment costs and offer ‘excellent value for money’ by achieving greater economies of scale and introducing improved governance and decision making frameworks.
Creating the operational structures required to establish a common framework and consolidate the assets of multiple separate entities is no mean feat. As Stephen Doyle, BNY Mellon’s head of UK institutional relationship development for asset servicing, identified in his recent article for the Local Government Chronicle, one of the primary considerations is the ability for the authorized entity to receive a consolidated view of the assets within the pool and to deliver consolidated reporting. Having the right data management practices and platforms in place is vital to being able to achieve this and ultimately deliver on the UK government’s goals to improve efficiency and decision making.
While the majority of pools will create Authorised Contractual Schemes (ACS) tax transparent structures to support their equity, fixed income, and some property investments, there will be alternative assets held that will not be in the ACS but will be part of the LGPS pool. The new pools may look to take on more direct investment themselves, particularly when it comes to alternative asset classes. For example, one of the pools has already said it plans to increase its exposure to direct property investment. Other alternative asset classes, such as private equity, private debt and infrastructure are also likely to become more accessible as the size of investible asset pool swells. While these may be considerations for a bit further down the road, consideration should be given to whether accounting and data management platforms have the flexibility to support new and more complex asset types and perform the enrichment and forward-looking analyses they require.
Simply centralising and consolidating investment data from the multiple local authorities that make up each of the new pools to gain a true view of assets, economic exposure and effectively measure performance and risk is a challenge in itself that will need to be overcome. Each local authority will have their own way of managing their data as well as their own classifications and definitions that will be different from the next. As these are combined, the new pools will need to establish systems and processes to standardise and validate that data to ensure it is accurate and fit for purpose. Having a centralised true overview of all investment data will be crucial to successful decision making and efficiency gains. At the same time, though, they will need to maintain the granular level of detail required in order to be able to report back to the constituent schemes.
The regulatory environment for the new pools also promises to be tougher than the one that currently governs the standalone managed defined benefit schemes. In addition to satisfying the reporting requirements of the participating schemes, the new pools will need to report to the Financial Conduct Authority and the Department for Communities and Local Government. The pools will need to ensure that they have formal data governance processes in place to ensure they are compliant with regulatory requirements around privacy, data protection, accuracy and transparency. The greater demands being placed on data and the increasing importance of data governance in the asset management industry has led to the emergence of the Chief Data Officer role; it’s unlikely that the new pools will have the capacity, at least at the outset, for such a position.
While data governance and management have a huge part to play in the successful consolidation of the LGPS funds and the delivery of the efficiencies and economies of scale the UK government expects and demands, the new pools may struggle to dedicate the resources or expertise required to manage their data effectively. Indeed, managing these systems and processes internally has the potential to distract from their core goals. As a result, a managed services model, where data management processes – such as cleansing, validation and integration – are performed by a third party, are likely to prove popular. Such an approach ensures the delivery of accurate and reliable data while keeping IT and support overheads to a minimum.
With our established track record of working with asset owners across the globe, we have seen many examples of how organisations have transformed their data management architectures. Many are centralising their investment data and developing a management model that enables them to manage and measure their assets efficiently. Often, this will involve the development of an Investment Book of Record (IBOR) that delivers a single version of the truth for all investment data with performance measurement to track results at many levels and support investment decision making. Increasingly we are also seeing organisations looking to adopt a managed services model to perform the data management and performance measurement functions.
From our experience, the earlier firms identify the data management implications of asset consolidation and the closer they put it to the heart of their operational transformation, the more successful they are in delivering on their business objectives. The LGPS reforms are designed to generate significant efficiencies and cost-savings and data management has a foundational role to play in delivering on those objectives.
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