Written By: Matthew Craig
When contemplating the asset pooling exercise taking place between the different members of the Local Government Pension Scheme (LGPS), it is hard not to avoid a few matrimonial analogies.
While there were already moves, or signs of romance, among some LGPS members to greater collaboration, such as the Local Pensions Partnership (LPP) set up by the London Pensions Fund Authority (LPFA) and Lancashire County Council, the main motivation for asset pooling came from the older generation, or central government. Ministers, such as then Chancellor George Osborne, made it very clear that they wanted to see the LGPS funds formed into a small number of large asset pools. A tight timetable was imposed, so we can think of this process as being either a “shotgun wedding”, when an impending birth forces a marriage, or an old-fashioned arranged marriage, when the parents of the eligible parties make the decisions on who will marry whom. But it is equally fair to say that once they realised what was required of them, the LGPS funds quickly found their partners and became their own wedding planners. In some cases, it was a case of marrying a local lad or lass, but not in all. Geographically convenient asset pools have been formed by the Welsh funds, the funds in south-west and southern England which became Brunel Pensions Partnership, the Northern Pool, LGPS Central, and the London CIV.
The Border to Coast Pension Partnership stretches south to north across England, but it has called itself a group of like-minded funds, so perhaps it is either a worthy attempt to widen the gene pool, or a long-distance romance coming to fruition. The LPP is a partnership that was already developing nicely when Osborne reached for his metaphorical shotgun, as was the London CIV, although that has been described by some as an exercise in cat-herding to date. The remaining pool, Access, consists of funds around the east and south of England from the Isle of Wight up to Northamptonshire and Norfolk, so perhaps can be considered a relationship built on familiarity, as well as the clear message that LGPS funds should get together unless they want to be forced to do so.
Having found their partners, the LGPS funds are now in the process of walking down the aisle and setting up a new home after a quick honeymoon. Different asset pools are choosing different ways to do things. At a recent LAPF Investments Question Time event in London, Brunel’s Matthew Trebilcock said Brunel is appointing external managers to run its £28 billion in assets. He said that up to five managers could be appointed per asset class, depending on the assets involved, the nature of the asset class and the risk profile required. Active equity portfolios will be managed by an authorised contractual scheme, and Brunel is now seeking a third-party operator to partner with. It has already set up £7 billion in passive equity mandates, as part of expected net savings of at least £27.8 million, or 8.9 basis points, by 2025.
While most asset pools are initially picking off the low-hanging fruit by setting up equity mandates for pool members, the Northern Pool is working on alternative assets first. This is on the basis that the three large northern funds already have very efficient equity mandates. Merseyside director of pensions, Peter Wallach, commented: “The Northern pool has focused on alternatives and direct investing from the start as that is where we see the greatest cost savings for us.”
The GLIL Infrastructure LLP, which was initially set up by Greater Manchester Pension Fund and the LPFA, can now be used by the members of the Northern Pool, and others as a vehicle with the scale and expertise to invest directly in infrastructure and other assets. Wallach commented: “By collaborating, we have a pooled team structure maximising the resources of each member and have developed professionalism in origination, asset management and support functions; something we could not have done as a single LGPS fund. GLIL is not a total solution, but could be part of the solution for any pension fund.”
Seeing more UK investment in infrastructure was a prime reason for central government to push for LGPS pooling. Jeff Houston of the LGA commented: “They wanted to see lots of money put into big headline projects in the UK, but they now accept that funds might need to invest abroad to diversify and get good returns. They have realised that banging on about infrastructure is counter-productive, as it brings out a contrariness in local government. But the Treasury is still in the background asking about infrastructure investments.” Houston added that new local government minister, Rishi Sunak, is very interested in infrastructure and would like to have conversations about affordable rented housing, but that will probably have to wait until after the summer, when the pools are up and running.
One of the biggest questions with asset pooling is how the new asset pools will take control of investment decisions, such as manager selection. To stretch a somewhat tenuous marriage comparison even further, will the new couples be able to do their own thing, or will the various in-laws and other family members want to have their say in all major decisions? As with most families, it won’t be possible to please everyone all of the time. Over time, it is easy to see the asset pools becoming more important in managing the assets, while the underlying funds assert their rights over investment strategy as far as it affects their own concerns.
The asset pools have also opted for more than one operating model, with some hiring an operating platform and others setting up an FCA authorised manager. It will be interesting to see if the models change over time. Cost saving is seen as one potential benefit of pooling, but in the short term, it may mean higher costs as new structures are created. The Access pool stated in its profile for an LAPF Investment Question Time event: “Some individual authorities could see their costs increase, as a result of the extra layer of costs in running the pool.”
To conclude, there is a very old and very well-known adage, “act in haste, repent at leisure”, which used to be applied to couples who married too quickly, among other things. Despite the haste with which the pooling process developed, the outcome should be a long, happy relationship that grows over time to deliver the outcomes that the sector needs.