The Key to Effective Stewardship

Frances Deakin, LPPI’s Head of Responsible Investment, outlines the reasons why a whole-scheme management model is the right approach for UK pension schemes.

“Stewardship encompasses everything that we manage, including our pension fund clients’ assets and reputation; it is not just about traditional activities such as engagement,” Frances Deakin told ESG Investor. “Viewing stewardship as everything we do is my definition of responsible investment (RI).”

RI has been Deakin’s chosen career for almost a decade, following many years in local government roles. She is currently Head of RI at Local Pensions Partnership Investments (LPPI), which was established in 2016 to enable UK local government pension schemes (LGPS) to pool resources and improve the management of their assets.

“By keeping down the costs of pension provision and being an efficient provider, LPPI can help ensure that more of local government resources are used to fund services,” she said. “If we do our job well and provide client funds with a healthy return over the long term, it’s good for them as employer organisations and the broader community.”

LPPI’s RI team contributes advisory, business partnering and policy, as well as supporting investment management functions. “My team consists of five dedicated staff, all members of the investment team. Additionally, we have satellite roles deliberately embedded in a couple of our asset class teams where they are local ESG experts,” Deakin said. “This is the best indication of how seriously we take ESG.”

The RI team’s main role is to ensure that the whole company is involved in delivering on LPPI’s sustainability objectives. “We act as a linchpin to encourage deeper understanding of what sustainability means,” she added. “It also chimes with our personal values. Many of us are holding pensions with the LGPS.”

LPPI’s stewardship style is based on continuous dialogue with its pension fund partners to understand their needs and objectives. Overall, it’s focused on long-term investment returns to pay pensions, which means it has good cultural alignment with clients, according to Deakin. “It needs to be about return because we’re here to pay pensions,” she said.

In Deakin’s mind, there isn’t any conflict between ESG and long-term returns. She welcomes the industry’s growing awareness that ESG is about looking for signs of market participants’ ability to deliver sustainable returns.

“These will be the companies that endure in the future, providing the services and products that the world will need to transition,” she argued. “This is not ‘wokeism’ – it’s about long-term sustainability.”

Managing the whole

An important anchor for LPPI’s stewardship activities is its whole-scheme management model, which implies that the investment team supervises and manages 100% of its pension fund clients’ assets.

“We’re also one of the few LGPS investment pools that does internal investment management,” Deakin explained. “We consider ourselves an institutional asset owner on behalf of our members, as well as an asset manager.”

LPPI’s partnership began with two geographically disparate entities – the Lancashire County Pension Fund and the London Pensions Fund Authority – that are diverse in terms of their operations.

“They have different needs, demands and employer organisations,” said Deakin. “And yet they formed this partnership by choice to gain the benefits that pooling can bring. It was these benefits that encouraged the government to mandate pooling.”

In its 2023 autumn statement, the previous UK government had set 31 March 2025 as a deadline for the consolidation of LGPS in England and Wales. It also recommended LPPI’s whole-scheme management model. “Our clients recognise the benefits that it brings,” Deakin insisted.

In the year to 31 March 2023, LPPI reported cumulative savings of £153.2 million (US$199 million) – meaning it was on track to deliver £200 million in cost savings by 2025, according to estimates. The key drivers that improved its savings figures were growth of AUM, lower fees negotiated with external managers, and an expanding portfolio of direct investments and co-investments.

Professional service

LPPI’s model centres on efficient investment management and stewardship derived from lowering costs and increasing scale, Deakin explained.

“Stewardship is a resource-intensive activity, if done properly,” she said. “Most pension funds lack the resources and dedicated in-house expertise to sustain the breadth and depth of focus that’s required. It’s necessary to stay on top of numerous areas simultaneously – such as sourcing data, running analysis, execution and monitoring external execution, and reporting.”

Pension funds are also faced with large and often complex portfolios, which can make it difficult to identify the most material issues. “It is challenging for pension funds to know what to focus on and where to allocate their resources,” Deakin argued.

LPPI, for example, is responsible for £26.3 billion of pension fund assets, as of 30 June 2024, and manages seven investment-pooling vehicles across seven asset classes: global equities, fixed income, infrastructure, real estate, private equity, credit and alternatives.

The investment environment is also highly intermediated, with multiple layers of intermediaries to navigate including advisors, asset managers, data, research and analytics providers – as well as investee companies themselves.

“Keeping those relationships fresh is a real challenge, which is why LPPI’s whole-scheme management model is akin to creating a mothership for our clients,” said Deakin. “It is a centralised and expert professional service, which helps ensure that pension funds are compliant with relevant regulations. They retain sovereignty over strategic asset allocation, but pass the rest to us.”

LPPI invests directly, but also appoints other managers.

“We have set up those relationships – from underwriting through to portfolio monitoring – and have levers to hold everyone to account through reviewing and reporting,” she explained. “That full continuum is within our model. It gives clients a better outcome than if they did it on their own, which was the government’s reason for mandating pooling.”

Best practice

As a Financial Conduct Authority-regulated asset manager, LPPI has maintained its UK Stewardship Code signatory status for the past three years.

Deakin is a strong advocate of the code. “We’re clear that we wish to remain a signatory and demonstrate how we’re achieving that to our clients,” she said. “The code is a clear benchmark for assessing our stewardship approach and an external assessment of the high standard of our reporting, which is an essential assurance for our clients.”

Importantly, the 2020 code’s definition of stewardship is broader than the traditional concept of engagement.

“It recognises that stewardship encompasses everything that the steward is engaged to do,” Deakin continued. “It has been useful for my work internally to be able to point to the code and say that this is part of what we should live and breathe within our processes.”

The Stewardship Code is currently under review, with the new version expected in early 2025. An outstanding area of contention for the industry, however, is the frequency and depth of reporting.

“It takes a lot of work to report on the Stewardship Code in addition to the other disclosures, which are mounting up for UK asset owners,” said Deakin. “There is a debate to be had on the cadence of reporting, as well as interoperability or equivalency with requirements under the Principles for Responsible Investment (PRI), for example.”

LPPI is also a PRI signatory, and Deakin herself is a member of a PRI working group discussing equivalency. With the PRI currently revisiting its purpose and mission and the Stewardship Code review, everything is in flux, she said.

She believes that the equivalency discussion will be put on hold until the landscape settles. “When that happens, we can focus on how the regimes could work better together to reduce duplication, but still get that level of assurance and external verification,” she added.

Next steps

LPPI is in good shape and is delivering on its targets, according to Deakin, but it must continue to evolve. Client needs and market opportunities change, develop and grow, while standards and best practices progress.

“We can’t stand still, even if we wanted to,” she said. “But we’re in a good place to start from, with a large professional team and an aligned, structured approach – the whole-scheme management model is the way forward for us.”

LPPI is currently in the third phase of its Net Zero Asset Managers commitment, and plans to onboard further asset classes this year. The focus for 2024 is baselining and setting net zero targets for the pension scheme’s infrastructure portfolio, which makes up a large chunk of its AUM.

“This comes with challenges because the availability of private market data is significantly less than for global listed equities,” said Deakin.

In addition, LPPI has published its first set of mandatory Task Force on Climate-Related Financial Disclosures reports, and will conduct a review of lessons learned during the process.

“It’s about providing transparency into who we are and what we do,” Deakin added. “While it isn’t all perfect, we’re doing a good job with what we’ve got. We’re also having honest conversations with our peers and regulators around difficulties, to keep expectations realistic.”

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