London CIV chair Lord Kerslake tells Rachel Dalton about the capital’s approach to pension pooling
The London Collective Investment Vehicle was the first Local Government Pension Scheme pool to be set up.
London Councils, reading the runes in the Department for Communities & Local Government’s consultation on cost-saving in the scheme, launched the CIV in 2014, more than a year before then-chancellor George Osborne compelled funds to form collaborative groups.
As the first vehicle of its kind in the LGPS the CIV was a blueprint – or guinea pig – for the groupings that would come later. It is notable that ministers insist all pools are set up with companies regulated by the Financial Conduct Authority at their core: the model tried and tested by the CIV. This is by no means the only way of investing collaboratively, and not some pools’ preferred option.
Given the head-start it had, it is unsurprising that the CIV is already ‘live’, in that it has some of its member borough funds’ money under management; the only pool to yet do so.
In the London model, the CIV creates sub-funds within its structure for each asset class the borough funds have requested. These sub-funds are run by external asset managers for which the CIV tenders on behalf of its members.
The chair of the CIV is Lord Kerslake (Crossbench) , the former head of the Civil Service and chief executive of Sheffield City Council and Hounslow LBC, among a series of other high profile roles. In an exclusive LGC interview he says maintaining the momentum in setting up the sub-funds is key.
“[The CIV] has grown to nine sub-funds and more than £5.6bn in assets under management, and there is more to come. We’ve set ourselves a growth plan over the next three to five years and we’re on track to meet it. The most important thing is to grow the [CIV],” he says.
The CIV offers or plans to offer soon access to five global equity sub-funds (three for capital growth and two for income, all measured against different benchmarks); a diversified growth fund; three total or absolute return funds; a UK equity fund; and an emerging market equity fund.
“We have a medium-term financial plan and we have an agreed sequence of the work,” Lord Kerslake says. Bringing fixed income products onto the CIV will be the next move, followed by infrastructure and property assets next year, he says.
The CIV will offer real asset investment products last because council funds will have existing investments in property and infrastructure that they cannot exit before their existing contracts end without paying a penalty.
“Boroughs have got commitments that they have to honour,” says Lord Kerslake. He adds there is a balance to be struck in ensuring it is bringing on board all the products members want to buy, but doing so sensibly, quickly and with minimum duplication or overlap between products.
“We want to grow in a way that’s in tune with what [member funds] want to achieve. It’s a difficult balance between our strongly held view that we want to be the [pool] of choice for boroughs, but recognising the government has established what it would see as a mandatory regime.
“We started as a voluntary scheme. We want to work with the boroughs and allow them to make the strategic asset allocation choices, but at the same time grow the [CIV] at pace.”
Lord Kerslake says the CIV aims to offer members a choice of providers for each asset class it brings into the CIV, rather than prescribing just one solution for each.
“We will want to be giving members at least one choice for the asset classes that they want to invest in and, if we can, we might offer more than one, but we can’t offer limitless choice.
“There can’t an infinite number; the risk is that would be more expensive.”
Even though the CIV aims to provide choice, Lord Kerslake says he hopes to see “significantly lower numbers” of asset managers serving the boroughs through the CIV than the number working with the boroughs individually now, although there is no target number of managers.
One of the government’s reasons for pressing ahead with LGPS pooling, apart from the fee savings it believes this will make for funds, is an enhanced ability for the scheme to invest in infrastructure.
Although the government cannot force funds to invest in certain projects, nor limit their investment to UK infrastructure only, pools have committed to investing more in infrastructure, collectively, than they do now. The theory is that as collective investors, they will have the means and the muscle to access larger, more profitable infrastructure deals than they can as individual funds.
As yet, there is no clear way for the pools to find and assess infrastructure opportunities in a cost-effective way. Current thinking points towards a single platform or gateway for all pools to access pre-vetted infrastructure projects, although it is not clear how this will be funded and who will create and run it.
“We certainly plan to do more on infrastructure. The collective scale allows opportunities that aren’t easily accessible to individual funds,” says Lord Kerslake.
However, like most, he has reservations about ploughing into infrastructure without due care.
“If you’re going to do this, what is the reason for it?” Lord Kerslake asks.
“Is it to realise better returns, or are you doing it because it’s part of providing investment for UK plc? If it’s the latter, it’s worth bearing in mind there is more money than investible opportunities, so when you go into that, you have to be sure it is a good opportunity. We are entering with care; we won’t rush because government said it’s a good thing to do.”
Many involved in pooling have warned of the folly of each pool pursuing infrastructure projects alone, as this will inevitably mean pools bidding against each other for the same opportunities and driving up prices.
“There’s got to be a degree of collaboration across the pools,” says Lord Kerslake.
“I’m not at all proud about it; if others have developed investment propositions and there’s scope for others to join the party, I would be up for that. Going into consortium models is one option; us coming up with propositions is another. We’ve got to be open to joining other people’s initiatives and avoid inappropriate competition.”
Lord Kerslake adds that the gateway model for the LGPS could be useful: “I’m not averse to that. There might be a number of gateways into different types of infrastructure. We’ve got to be big enough to see collaboration and specialising in some of these areas makes sense.”
The London CIV’s structure has raised a few eyebrows. The CIV is governed by a joint committee, comprising one representative from each participating borough’s pension fund committee.
It has been said securing firm decisions from a a committee of 33 members, representing the 32 boroughs and the City of London Corporation, must be more difficult than the smaller committees governing other pools, which have between three and 13 members. Some suggest this would hamper the CIV’s development.
But Lord Kerslake says the running of the CIV and representation of members is “largely amicable”.
“We are reviewing how things work in the light of the more mandatory world we’re moving into,” he says.
“The challenge is that you have 33 London boroughs. They have their own investment plans. They have their own policies on things like environmentally responsible investment; some are keen, some are less keen.”
Lord Kerslake says the committee, chaired by City of London deputy policy chair Sir Mark Boleat, meets “four or five times a year”.
“What we try and do is make sure we put in front of that committee the key, strategic decisions; you can’t deal with every individual borough’s particular issues in that meeting,” he says.
“So we have decisions like the medium-term financial plan. It can work at that level, provided you keep the level of discussion at the overarching progress of the CIV and [funds] don’t confuse their roles as customers with their roles as owners of the company.
“We’re keeping it under review.”
Overall, the CIV’s aim is to improve the performance of London boroughs’ investments, without creating an unnecessary and costly layer of organisation in between pension funds and their asset managers, Lord Kerslake says.
“Our challenge is to respond to their differing needs, but not create an elaborate and expensive set of relationships.”