The Local Pensions Partnership – the vehicle owned by the London Pension Fund Authority and the Lancashire CC pension fund – has ambitious plans to make the most of pooling.
The LPP is described as an asset and liability management partnership, owned 50:50 by the two funds. The partnership provides a vehicle via which the two founding member funds can pool their assets to satisfy the government’s requirements for Local Government Pension Scheme funds to invest collectively; at present their combined value is around £11bn.
The LPP also runs the LPFA and the Greater Manchester Pension Fund’s infrastructure investment vehicle, GLIL, in which the West Yorkshire, Merseyside and Lancashire funds also participate.
Sir Merrick Cockell, chair of the LPFA, is at pains to emphasise that the partnership is more than investment pool but that it is in the market to provide services to more funds; not just as a pooling partner, but as a fund manager in its own right, via its in-house investment team, and as an administrator.
In this way, it can satisfy the government’s requirement for pooling projects to provide LGPS funds with the scale to invest in infrastructure and the collective buying power to drive down investment management fees.
“We’re talking to others who might wish to come in,” Sir Merrick says, “but also LPP may well grow in other ways.”
He says the LPP provides pension administration services to other funds, covering 500,000 pension scheme members: “It’s a clear growth area,” he adds.
Sir Merrick also says the LPP will tender for investment management contracts, competing with the asset management industry.
“On the investment side you’ve got the Welsh [LGPS pool] tender coming up, for instance,” he says, referring to the eight Welsh funds’ forthcoming tender for a manager for their active equity assets.
He believes the LPP has a unique offer because it is owned by two public sector organisations, giving it an ethos the other LGPS funds may find attractive.
“I don’t think there will be any other in a sense public sector – if you see LPP being public sector – bidders [for LGPS investment management contracts] who have the right experience and registrations. The others would be private sector. We’ll have something distinctive to offer,” he says.
Sir Merrick adds it is “entirely possible” that the LPP will provide services to pension funds other than the LGPS and that “the model and the Financial Conduct Authority approvals allow for that”, although it is not a primary focus at the moment.
And it doesn’t stop there. Sir Merrick says he could see the LPFA being part of the solution to the problem of rising academy numbers, as individual employers joining the LGPS, placing an unmanageable burden on individual LGPS fund administrators, not to mention playing havoc with liabilities.
“At LPFA over the years, we’ve been very strong on looking at covenants, building relationships, which is not common throughout LGPS, being active with employers, and if covenants are less strong, making sure that the interests of the fund are not at risk,” he says.
Sir Merrick says the LPFA “could be part of the solution” if the academies and free schools were moved from their local fund and placed in a separate fund that the LPFA could then administer – provided the government stands behind the liability, at least until academies could demonstrate strong financial performance.
“If the government thinks [it] can divest from long-term liability on it, that becomes extremely difficult, if not impossible,” he says.
He added there are precedents for consolidating separate assets and liabilities relating to a specific employer or type of employer into one combined fund. He cited the merging of assets relating to the Valuation Tribunal Service, previously held in different LGPS funds, into one unit within the LPFA fund.
There was a sense late last year that the momentum of the pooling project had been lost following George Osborne’s sacking from the Treasury. But Sir Merrick feels Marcus Jones, local government minister for the duration of the pooling approvals process, did not “ease off”: “I don’t think anybody’s is in two minds that the government want this to happen,” he adds.
Infrastructure may be less of a focus in future, Sir Merrick says.
“Clearly, Osborne was very motivated by infrastructure. His real driver was: could the LGPS be funding significant infrastructure? Perhaps that has changed; the government has been flexible, seeing LPP is not at £25bn but it’s on a journey and it’s done all the right things,” he says, in reference to the government’s requirement that pools manage total assets of £25bn or more.
Regardless of a lack of any further edicts from on high about funds investing to rebuild Britain, Sir Merrick clearly feels infrastructure is a valuable investment in its own right. The question is how best to structure a vehicle through which the LGPS can benefit from opportunities.
“I’ve spent a lot of time on looking at infrastructure and suggesting a gateway or vehicle [on which] all the pools could jointly have to look at projects centrally and then vet them,” he says.
“The reality of making that work within the complicated LGPS world… there will never be one solution.”
Sir Merrick says GLIL was a proactive and flexible way of getting infrastructure investment off the ground. The project began with a meeting between himself and Greater Manchester Pension Fund chair Keiran Quinn (Lab).
“We just said, ‘let’s get on with it: you allocate a quarter of a billion, we’ll allocate quarter of a billion, these are the basic criteria, let’s just start doing stuff’,” says Sir Merrick.
He adds that the participation of West Yorkshire, Merseyside and Lancashire since GLIL’s creation in 2015 demonstrates its value: “They’re not doing it because anyone’s pushing them. Some of those funds are very forthright on their view of the world. So they’re participating in GLIL because they want to and they see value in it,” he says, adding: “I hope others will.”
Infrastructure investing is, as Sir Merrick puts it, “a totally new world” for the LGPS, but he adds GLIL has started to make an impression on the infrastructure scene and other funds could benefit from this rather than having to start from scratch.
“When GLIL started, I went to talk to people and they said, ‘what’s the LGPS [doing] in infrastructure projects? Who the hell is this, talking to HS2?’” he says.
“Now we are active participants and part of the landscape,” he says, and adds “everybody wants the money” and that the investment team would not have time to meet with all of the interested developers or investors looking to partner with the LPP. The rest of the LGPS could easily participate, he says.
“Here’s a very easy model of showing cooperation within the sector. GLIL has allocated half a billion, now we’re at £1.3bn, in a few years’ time why couldn’t it be £4bn or £5bn?”
The LGPS, Sir Merrick says, has a key role to play aside from having the capital to invest in infrastructure projects.
“Most large investors, be they international or sovereign wealth [funds] or whoever, want a local partner,” he says.
“The LGPS brings enormous local knowledge. [Funds’ pension committees] really understand their areas, they understand in a project where the blockages may be, indeed they can maybe help to unlock some of the blockages or at least they know who to talk to. That’s a very strong offer for a co-investor to bring,” he says, adding that the Greater Manchester Pension Fund was “absolutely key” to attracting, through its own investment, the backing of Chinese investors in Manchester Airport.
The LGPS should be a long-term, engaged investor, and one that considers the social benefit of the projects in which it invests, Sir Merrick says.
“I don’t think pension funds should be just another convenient form of funding,” he says.
“Very often we are active investors. We have a seat on the board [on the projects in which we invest]. You look for a long-term participation.”
Greater LGPS investment in housing has been mooted as part of the solution to the housing crisis, and although housing is not considered infrastructure in most cases, Sir Merrick feels it is an opportunity for LGPS funds – as well as a moral duty.
“We’ve got a [housing] project which we’ve been talking about for years, which is finally happening, down in Pontoon Dock in Newham; we’re funding 80% of it; that’s £50-60m,” he says.
He said the housing, for sale and private rent, provides an income stream that the LPFA and Lancashire funds can use to meet their cash-flow needs but that also benefits the public.
“I don’t subscribe to the view that you should be blind to the social benefit of pension fund investments and that it should be entirely on fiduciary concerns,” he says.
“Our role is to make sure we pay our pensions right, on time, and that we’re fully funded, but why can’t you have a social benefit at the same time?”
He says a housing fund that invested in building private rental property across the country, smoothing and equally distributing returns to LGPS funds investors to take account of variations in rental income, could be “the next opportunity”.