The intensity of the pensions pooling project is set to ramp up in 2017. While previous years have been dominated by negotiations between funds and with central government, this year will be about implementation, which comes with its own set of challenges.
Most of the pooling groups have now been given the green light by local government minister Marcus Jones but some have been told to adjust their plans or that the government would revisit them. The Access group, which in November attempted to negotiate a joint procurement solution rather than a collective investment scheme, was told in a letter from DCLG that it must form a CIV. The Welsh pool and the Local Pensions Partnership, comprising the London Pension Fund Authority, Lancashire and Berkshire, had not submitted proposals that met the government’s requirement for pools of £25bn in value.
However, in a letter to the Gwynedd Pension Fund committee, Mr Jones said that in light of Wales’ “long history of co-operation” and the “possibility of eventual devolution” of oversight of the funds to the Welsh government, he was happy for the eight member funds to proceed.
In the LPP’s case, Mr Jones noted the group was “exploring partnerships with funds both within and outside the LGPS” and that the funds in the Northern pension pool – West Yorkshire, Merseyside and Lancashire – have joined specialist infrastructure vehicle GLIL, created by Greater Manchester Pension Fund and the LPFA. “I continue to expect you to deliver increased effective scale in order to reduce costs and will review the position in the spring,” Mr Jones wrote.
Having received official approval, the next challenge is to implement the pools, says Dawn Turner, chief pensions officer at the Environment Agency, which is part of the Brunel pool. Ms Turner says this includes appointing board members and directors, for which Brunel has hired a recruitment firm, and the full councils of each of the administering authorities of the funds in the pool must all approve the plans.
“During all of this we’re still developing the shareholder agreements and the articles of association. Once all of that is in place the company can officially begin,” Ms Turner says.
The Brunel pool will be run by a company owned by the funds, which must be approved and then regulated by the Financial Conduct Authority.
Ms Turner says Brunel must submit its application for the company to the FCA by September, to leave enough time for that to be processed and then for the operational company to complete its preparations to go ‘live’ in April 2018.
The London CIV is already FCA-regulated and has funds under management, having gone live in December 2015.
Chief executive Hugh Grover says: “Our top priority is to continue to build out the product offerings. We have six sub-funds open – and we have another three sub-funds to open in the spring. We’re part way through a major global equities procurement; we would like to open that before the summer break. We want to bring in fixed income sub-funds.”
Mr Grover says he expects the CIV will eventually offer between 20 and 30 sub-funds to its members.
Illiquid assets will prove more difficult to move into the pools. The government has recognised this and said illiquid assets need not be transferred to the pools by the April 2018 deadline.
Ms Turner says the Brunel pool must plan how and when it will move illiquid assets into the pool. “We need to develop the portfolios for the illiquids. Some of them are very long-term and it wouldn’t make financial sense to move them [yet], but Brunel wants to develop a full management service for the funds. The timing of that is yet to be finalised.”
Mr Grover says moving illiquids into the pool is “likely” to take “many years”.
“We will start working on opening up some of those alternative products in the fullness of time. They’re not on the agenda for this year,” he says.
The government instructed funds to invest in infrastructure in particular as part of its pooling reforms and Mr Jones reiterated this in his approval letters, but Mr Grover says the government’s interest in the infrastructure element is waning. It confirmed last year it would not set a target value for infrastructure investments.
“The government has said it wants pooling to deliver infrastructure but it hasn’t shown any desire to actually impose that and doesn’t really have the power to do so,” says Mr Grover.
“We continue to look at infrastructure as an asset class. We’re not averse to UK infrastructure, we just need to see the right products. We’ve got a lot to do at the moment, and infrastructure isn’t top of our list.”
One of the biggest challenges for funds will be timing with other funds the sale and repurchase of assets, as funds move their money into pooled vehicles, to avoid perverting prices.
Ms Turner says the cross-pool working group had discussed this. “We have to maintain communications and try to ensure that we don’t pervert the market through anything we’re doing. The likelihood of us all doing something at the same time is reduced because we’re all implementing slightly differently,” she says.
Mr Grover said the risks could be overcome through close communication. “It’s not entirely clear to me when some of the other pools will start their transitioning process so at the moment it’s not a live issue, but once they open up some of their sub-funds we will need to make sure we communicate,” he says.