Local Authority Pension Performance Analytics – LGPS
Local Authority Pension Performance Analytics (LAPPA) enables Local Authority pension funds to view their Fund investment performance within a long-term, peer group context that will enhance governance and improve decision making.
Why Local Authority Pension Funds Use LAPPA
We agree that a fund’s primary measure of performance should be to appraise performance against its own strategy. We also believe that understanding what peers are doing can provide funds with valuable contextual information, which enhances decision making.
From our perspective, looking ‘inside’ at its investment performance data enables a fund to determine where it stands in relation to meeting the fund’s liabilities, and provides some insight on the degree of skill that is being brought to bear on the fund’s management. When a pension also looks ‘outside’ it equips itself with an additional perspective on how other funds are executing their fiduciary responsibilities, which also makes an appraisal of relative skill possible.
In our experience, this helps funds to challenge the governance of their fund management – for example, by avoiding the possibility of being content with performance which, whilst meeting benchmarks is well behind that achieved by peers. LAPPA’s data also contains information about different fund strategies and their relative success, the consideration of which may serve to enhance the risk/return profile of the incumbent fund. The analysis demonstrates where risk has been rewarded and where return has been given up for little benefit.
The Example of Active Management
In 2016/17 most global equity managers employed by Local Authority funds underperformed the market index benchmark. In isolation, a fund that was unhappy with such performance, may have decided to change manager. Knowing that underperformance was prevalent across the sector gave an additional dimension to discussions and may have helped to prevent costly changes.
The Example of Benchmarking
A number of funds hold assets that are benchmarked against cash or cash plus a percentage point or two. Given the very low level of return from cash over the last decade this is an exceptionally easy hurdle to beat (and below actuaries’ expected asset growth assumptions). Funds that have such a benchmark in place may then be content that the scheme is outperforming comfortably. However, when put into the context of other schemes it will be apparent that the fund is performing poorly because of benchmark decisions that have been made. Such information will allow the investment committees, panels and boards to question and review the decisions made. This may result in changes but, perhaps more importantly, the discussion will bring about a better understanding of why the Fund is invested the way it is.
The Local Authority Peer Group
The peer group Universe constructed by LAPPA currently comprises 63 funds with an aggregate value of almost £180bn. This represents over two-thirds of local authority pension fund assets. The Universe has thirty plus years of detailed historical data making it unique and increasingly essential for those funds that wish to place their performance in a long-term context.
As greater focus is being brought to bear on short-term performance, the feedback LAPPA gets from its Local Authority pension fund clients is that they derive considerable benefit from the availability of such contextual information: enabling them to resist a perceived pressure to unnecessarily churn managers; to allow their strategies time to play out, and to better ensure strategies are consistently aligned with their long-term liabilities.
With the arrival of Pooling in England and Wales we believe that relevant funds will be exposed to increasing levels of scrutiny. The peer group analysis provided by LAPPA will allow comparison between pools and within pools. Funds with access to LAPPA’s data will also be able to quantify the differential impact of pool costs across funds by analysing performance before and after these additional fees.
LAPPA’s analysis is completely independent and objective, and, being affiliated to neither investment managers nor consultants there are no vested interests.
If you’d like to learn more about how LAPPA can help you enhance the governance of your fund please get in touch:
Karen Thrumble Karen.firstname.lastname@example.org
Neil Sellstrom Neil.Sellstrom@pirc.co.uk
Tim Bush Timb@pirc.co.uk