The Cambridgeshire Pension Fund is investing £15m in the Cambridge Building Society, enabling the society to support more people in buying their homes in the region while at the same time providing a stable and attractive investment return. The investment is the first of its kind between a building society and a local authority in the UK.
The £2.8bn fund is administered by LGSS. LGSS provides both professional and transactional services to the Cambridgeshire fund, as well as the Northamptonshire CC fund, including the identification of suitable investment opportunities to meet the investment needs of the two funds for the ultimate benefit of their scheme members.
LGSS first became aware of a potential investment opportunity in the building society in early 2016. Cambridgeshire had already made a direct local investment into a financial institution in the form of our investment partnership with Trinity Hall, Cambridge into a new challenger bank, the Cambridge & Counties Bank.
LGSS approached the building society to establish whether it was a proposal worthy of placing before the investment sub-committee of the Cambridgeshire fund.
The Cambridge Building Society was looking to raise £15m of regulatory capital to grow its mortgage lending business. The issue was to be in the form of core capital deferred shares (CCDS), instruments which meet the criteria of common equity tier 1 capital as they are a perpetual instrument and distributions are discretionary.
The society agreed it would publish a distribution policy offering a distribution rate for the CCDS of Bank of England base rate plus 5%. The CCDS instrument and the eligibility of the CCDS as common equity tier 1 capital was pioneered by the Nationwide Building Society, which first issued CCDS in December 2013. The proven success of the instrument in enabling the growth of a building society, the status of the Cambridge Building Society as a long-established local business with a proven, robust business model, and the attractive yield offered resulted in the investment opportunity being proposed to the investment sub-committee in May 2016.
The society presented to the sub-committee, which saw the attraction of the investment, particularly that it would provide a competitive return linked to changing interest rates over the long term, matching the fund’s long-term liabilities. The sub-committee therefore sought exclusivity for the entire £15m CCDS issue and approved the investment opportunity subject to due diligence.
While the investment decision was based on fiduciary requirements, the investment would also result in additional benefits, including those expounded by the chairman of the Cambridgeshire fund, Roger Hickford (Con): partnering with a long-established Cambridge-based business that supported local people in buying local homes.
The due diligence process was undertaken using both external and LGSS resources and concentrated on a number of areas including:
- Obtaining assurance that the capital requirements would be met, thus enabling the society to grow its business
- Ensuring the society was financially capable of paying the expected CCDS distributions to the fund in accordance with its distribution policy
- Verifying the society’s low level of credit losses and arrears that appeared well below average
- Reviewing the society’s defined benefit pension scheme, ensuring projected pension deficit payments would not prevent the society paying distributions to the fund.
The due diligence process extended the investment timeline, as did local and national elections from the decision-making perspective. The due diligence process concluded positively in spring 2017 and the final investment approval was granted in early summer 2017.
The fund’s innovative investment into the society forms part of a c. £575m allocation to alternatives; mainly real estate, private equity and infrastructure. While each investment is individually attractive on its own merits, each also acts as a great diversifier from traditional asset classes.
This investment was a lesson in pursuing the right investment with the right partner. By partnering with the Cambridge Building Society, an established, reputable local business with a straightforward and highly robust business model, the fund has been able to secure a stable, attractive investment return for its scheme members.
Mark Whitby, head of pensions, LGSS