Development of the Target Operating Model (TOM) and asset template progress. Update on the property search. Options for terms & conditions of Employees of BCPP Ltd. Company committee structures and the roles of Non-Executive Directors. Governance requirements for BCPP Ltd. as a Financial Conduct Authority (FCA) regulated entity. Update on the Executive search, remuneration and recruitment process. 4.7 Attached as Appendix A is a high level project plan showing progress made since receiving ministerial approval. The key change to note is the change of proposed “go live” date to 1 June 2018, a slippage of two months. 5. BCPP – OPERATING MODEL 5.1 The key areas of scope within this workstream are summarised in the table below: Core Activity Description Status Tax and Financial Services tender Tender for external consultancy services covering the tax and financial considerations relating to the Operating Model and asset structuring Completed Operating and Regulatory Model tender Tender for external consultancy services covering the selection of the depository, FCA compliance and ICT design and implementation Completed Operating FCA approved process, selection of depository and associated service providers, and design, testing and implementation of ICT (in conjunction with external advisor(s)) Ongoing & to plan Asset allocation template Design of the asset allocation template detailing the sub-funds to be offered – to be approved by the Joint Committee Ongoing & to plan Sub-fund prospectuses Drafting of the prospectus for each sub-fund – to be approved by the Joint Committee and reviewed/approved by the FCA To commence in summer 2017 Transition planning Timetable for transition of assets and selection of appropriate external transition managers To commence in summer 2017 Resource planning Determine the appropriate level of resources to manage the proposed sub-funds – linking with the people workstream To commence in summer 2017 5.2 All external advisors for the workstream are now in place: Legal (Eversheds Sutherland); Tax and Financial Services (Deloitte); and Operating and Regulatory Model (Alpha FMC)
Costs (Capital) A shares at a cost of £1 to acquire the Fund's share of ownership of BCPP Ltd., and Class B shares at a cost of €833,333.34 as 1/12th share of the €10 million required to be set up as the required regulatory capital for an investment management company of the structure proposed by BCPP. Both paid by Teesside Pension Fund. Funding (Capital) Nil Estimated Cost Benefit Projected Funding (£) Project Cost (£) Additional Income (£) Cost Reduction (£) Cost / Benefit (£) Payback Period (Mth) Nil Nil Nil Nil Nil Nil Benefits - Non-financial or Non-cashable (e.g. staff time) Measure Description Current Target Regulations Compliance with LGPS Regulations There is a dependency on BCPP to be ready to receive investment assets. TPF proposals regarding use of BCPP when are available and pass the Fund's due diligence test. Full compliance Resilience Based on the plans for staffing at TPF (if internal management continued) and BCPP (if assets transferred to BCPP to manage), greater resilience to management of the Fund's investment assets. Risk with current staffing situation in the run up to pooling. Staff numbers may reduce to a point where the Fund cannot be managed effectively. Mitigating by exploring a plan of transforming the investment assets to units in unit trusts (passive funds) which require much less intensive management and Resilience across all investment asset groups.
Broader range of investment assets available. With BCPP, it is planned that (in time) there will be access to greater specialist resources which should allow access to a broader range of investment assets, e.g. co-investment opportunities. Such investments are not currently viable for the Fund to invest in. Access to new investment assets which are currently not considered viable. Initial Project Categorisation Rating Benefit % Complexity % Full Fwork or POAP Comments 22% 67% Look to split the project into 2 (Assets and Staffing) after key decision is made by the Panel on which assets will transfer to BCPP. Risks Risk Description Owner Likelihood (1-5) Impact (1,2,3,5,7) Risk Score Mitigating Actions Staffing - Period up to Asset transfer and/or TUPE of staff PC 5 7 35 Plans being developed to transform the existing asset structure to units in unit trusts (passive funds), if needed. Staffing - Key Man Risks within the L&I team PC 5 7 35 New staffing structure will look to address this in the longer term. Additional resource required to assist with pooling project - approved by S151. Plans being developed to transform existing asset structure to units in unit trusts (passive funds), if needed. Assets (continued management up to pooling) PC 5 7 35 Investment Panel workshop provides guidance and agreement in principle over the future investment management strategy, including an interim solution through greater use of unit trusts (passive funds). Transfer of Assets to BCPP PC 5 7 35 Investment Panel workshop and June Panel meeting will set the strategy for use of the pool as an investment management solution & transition management arrangements with BCPP and a (potentially) procured transition manager and/or TPF Custodian.
Appendix C Asset Strategy Existing Resource Future Delivery Benefits Risks Equities £2,945m 80% Active management UK & Overseas In-house team Long term reduce allocation (to 70%) Mgmt.: >4 WTEs (est. 5 WTEs) Admin.: & needs investment to meet potential future demand Fund Experience & track record Already set-up Provides VFM (lower cost) Control retained Shareholder governance ownership Engagement through LAPFF Non-compliance with LGPS regulations MiFID II Broker/Research Resilience & key man risk (Mgmt. & Admin.) when matched against BCPP Requires investment (staffing & systems) New Custodian (very complex) to implement & project manage (how can we backfill costs to provide near turn-key solution?/effect on trading activity?) Staff retention problems (new competitor in Leeds) – are they to be replaced? Resources restrained MBC Recruitment – can we get the right staff & how long to train them? No staff base to draw from for Legacy Assets / Governance (Mgmt. & Admin.) Pool Compliance with LGPS regulations BCPP proposal shows resilience Built on LGPS experience & track record Provides greater investment options? Direct engagement Existing staff to potentially draw from for Legacy Assets / Governance (Mgmt. & Admin.) New Custodian less complicated to implement & project manage No track record (at Pool) No guarantee LGPS teams will gel Costs estimated (£5.8 to £10.1 m p.a. shared by 12 Funds) Start date unknown for sub Funds ACS – transparency gone Shareholder governance may be compromised Ext. Manager (IMA) Experience & record Reduced internal staffing required (Mgmt. only) Management resilience? Expensive Transition risks and costs Churning? Shareholder governance may be compromised Ext. Funds (Active) Experience & track record Reduced internal staffing required Management resilience? Very expensive In-specie transfer? Shareholder governance compromised
Ext. Funds (Active) Experience & track record Reduced internal staffing required Management resilience? Very expensive In-specie transfer? Investment Income? Ext. Funds (Passive) Certain of performance Comparable cost to internal, active mgmt. Reduced internal staffing required Performance from asset allocation decisions only Transition risks and costs (much less than Ext. Man. (IMA)) Investment Income? Property £254m 7% Mix of direct property & indirect collective investment vehicles Non-discretionary external management agreement Long term increase allocation (to 10%) Mgmt.: <1 WTE (est. <1 WTE) Admin.: (key man risk exists) & needs investment to meet potential future demand (Fund makes the decisions) Currently, experience at the Fund of this arrangement No ownership transfer needed in near future Existing staff to potentially draw from for Legacy Assets / Governance (Mgmt. & Admin.) Resilience (existing staffing arrangement too small) Key man risk Staff retention until pooling Pool Access to other markets (long term) Potentially reduced fees solicitors?) Pool not ready for direct property for 3-5 years Ownership transfer – tax? Unknown future investment strategy/staffing Discretionary Experience & track record of mgmt. No ownership transfer needed in near future Reduced internal staffing required (Mgmt. only) Management resilience? No experience at the Fund of this arrangement resource still required Loss of control Transparency Ext. Experience & record Reduced internal staffing required Management resilience? Sale of existing portfolio? Expensive Lack of transparency Income? Management resource needed for PUTs/LLPs Admin resource for draw-downs & receipts (LLPs) Redemption timetable
Alternatives £59m 1.5% Mix of direct ETFs (commodities) and funds/partnerships (absolute return funds & infrastructure) Long term increase allocation (to 5%) Mgmt.: <1 WTE (est. <1 WTE) Admin.: Meets small current requirement & needs investment to meet potential future demand Existing Mix Control over investments (Limited) experience Actively drive investment over next 3-5 years Co investment potential with greater experience Existing staff to potentially draw from for Legacy Assets / Governance (Mgmt. & Admin.) Resilience (existing staffing arrangement too Key man risk needs correcting retention until final LLP investment run-off High LLP fees (but reducing all the time) Pool Experience from other LGPS Funds Fee reductions through scale Co-investment (long term) Pool not ready for 3-5 years? No clarity yet as to how the mechanics of investing will work Ext. Manager (IMA) Quicker investment of cash? Experience & record Reduced internal staffing required Management resilience? Expensive Lack of transparency Income? Admin resource for draw-downs & receipts (LLPs) Cash £401m 11% Short term investments Long term reduce allocation (to 3%) Mgmt.: <1 WTE (est. <1 WTE) Admin.: MBC provide Fund The Fund must still provide resources for cash flow and treasury management MBC provide?