LGC research can reveal a complete picture of Local Government Pension Scheme funds’ plans to pool their investments.
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The funds, which have combined assets under management (AUM) of around £190bn, have been ordered to form six pools of approximately £25bn each in order to strengthen their bargaining power when buying investment management services.
The government has also specified that pooled vehicles must invest significantly more in infrastructure than individual funds do now.
Currently, council pension funds allocate around 0.5% of their portfolios to infrastructure, compared to an average of 4.3% among global institutional investors.
The government has consulted on a new regulatory regime, removing restrictions on investing in a number of asset classes, to further this aim (see page 8). It also believes the lack of infrastructure investing is because individual funds do not have the scale necessary to afford and properly monitor such investments, hence its move to push funds towards pooling.
However, some funds have complained that the barrier is actually a lack of investment opportunities suitable for their risk profiles.
The deadline by which funds had to submit draft plans for their pools fell on 19 February. It is anticipated that the government will provide feedback on the proposals. In a Treasury document released at the time of the Autumn Statement, the government said it would impose structures on funds that did not produce plans that were “sufficiently ambitious”. The government expects final plans to be in place by 15 July.
LGC’s research has shown that eight pools have emerged, although two of these have plans to join together.
Most funds have organised along geographical lines, partnering with neighbouring counties or in the case of the London Collective Investment Vehicle, boroughs. However, there was no requirement for funds to arrange according to location and some pools have gathered together funds with similar investment strategies as the main priority.
For some funds, the possibility of joining a pool with other funds who run some of their investments in-house was an attraction. The Midlands pool will allow participants to access fellow funds’ in-house management; West Midlands runs its own passive global equities investments, for instance.
However, others took the opposite view and for some groups this was a bone of contention. A Cambridgeshire pension fund committee report said the question of in-house management was a “difficult issue” during pooling negotiations because some funds found in-house management “highly unconvincing” and did not want to join a pool with funds that used it.
Some pools are planning to join forces to meet the £25bn requirement, whereas two have submitted plans for less than £25bn despite the government’s demands.
Only Hertfordshire has yet to announce firm plans. Patrick Towey, head of specialist accounting at Hertfordshire CC, told LGC the fund is “evaluating [its] options” and will make a decision about which pool to join “over the next few weeks”.
He added that Hertfordshire’s submission to the government makes clear that the fund is “committed to pooling”.
Hertfordshire’s pension fund committee papers have revealed that the fund had held talks with the London CIV and Access. London CIV chief executive Hugh Grover has previously said the vehicle is not exclusively for London borough funds and was open to county funds joining.
The Access group (“A Collaboration of Eastern, Central and Southern Schemes”) includes East Sussex, Cambridgeshire, Essex, Hampshire, Isle of Wight, Kent, Norfolk, Northamptonshire, West Sussex and Suffolk.
The approximate combined AUM of those funds is £29.5bn, although it is not yet clear whether the funds will pool all of their assets.
The government expects most but not necessarily all of a fund’s assets to be pooled, making concessions for existing long-term investments that funds would be penalised for exiting earlier than agreed.
The Access pool includes some of the funds within the National LGPS Frameworks. Cambridgeshire, Norfolk, Northamptonshire and Suffolk had already worked together through the frameworks, which provide cheaper access to actuarial, investment consultancy, custody and legal services for funds through a pre-procured platform of providers. The other seven English funds using the frameworks – Buckinghamshire, Croydon, Dorset, the Environment Agency, Hackney and Lincolnshire – have joined other pools.
While the existing frameworks do not provide access to investment management services, and so do not count as pooling options, Norfolk last year proposed a procurement framework for some investment management services as an alternative to pooling via CIVs or similarly formal structures.
The Access pool, however, will be more formal structure than a procurement framework. Suffolk pension committee papers revealed that the funds in the Access pool favoured a “multi-asset pool” structure, which provides access for the participants to grouped external asset management contracts, and in-house management if they wish.
Border to Coast
With 13 member funds, the Border to Coast pool has the most participants aside from the London CIV. With an approximate pool value of £36bn, it is also towards the top end of the scale in terms of AUM.
The pool includes Bedfordshire, Cumbria, Durham, East Riding of Yorkshire, Lincolnshire, North Yorkshire, South Yorkshire Passenger Transport Authority, South Yorkshire, Surrey, Teesside, Tyne & Wear, Warwickshire and Northumberland.
The founding members, Cumbria, Surrey and East Riding of Yorkshire, identified and invited other funds to join based on their investment philosophies. The legal structure of the pool has yet to be decided, but the funds have already said they will set up the partnership as a separate entity of which each participating fund will share ownership.
The Border to Coast group is also in talks with the Northern Powerhouse group about collaborating on a separate infrastructure vehicle.
The funds in the Brunel group have a combined AUM of £22.7bn, below the £25bn threshold. The pool includes Avon, Buckinghamshire, Cornwall, Devon, Dorset, the Environment Agency, Gloucestershire, Oxfordshire, Somerset and Wiltshire. The proposed legal structure for this pool is not yet known, but previous reports prepared for the Avon pension fund committee have suggested that creating a separate corporate entity to run the investments would involve “significant costs” and establishing a joint committee, led by a single authority, might be preferable.
The Local Pensions Partnership and the Northern Powerhouse
The LPFA and Lancashire announced their intention to create a pooled arrangement, worth £11bn in late 2014, and this is on track to go live in April. The LPFA also established an investment vehicle specifically for infrastructure with the Greater Manchester fund, worth £500m.
At just £11bn, the LFPA and Lancashire’s vehicle was under half the size required by the government. However, they have exchanged “letters of intent” to work together with the £35bn Northern Powerhouse grouping of Greater Manchester, Merseyside and West Yorkshire. The LPFA and Lancashire also said in their submission to the government that they “hope to include Berkshire” in their pool, which will become known as the Local Pensions Partnership.
Together, these six funds could create a pool of more than £45bn. The proposed pool will take the form of an ‘asset liability management’ partnership. The LPFA’s asset liability management approach means assessing liabilities in order to determine the investments that will best meet a pension fund’s future commitments, rather than only focusing on increasing returns.
The £35bn Midlands pool comprises Cheshire, Derbyshire, Leicestershire, Nottinghamshire, Shropshire, Staffordshire, West Midlands, West Midlands Integrated Transport and Worcestershire.
All the funds in the pool, as well as Warwickshire, but excluding the West Midlands and West Midlands Integrated Transport, had worked together previously to jointly procure a passive mandate from Legal & General Investment Management, to secure a 60% reduction in fees.
The pool will offer its members access to external investment management and in-house services. Its proposed legal structure is not yet known.
The £25bn London CIV has been considered by some to be the blueprint for LGPS pooling. Work began on the vehicle in 2013. It appointed Allianz Global Investors to run its first sub-fund, for active global equity alpha, in November. The sub-fund launched with £501m in assets from three London boroughs, making the London CIV the only pool that is currently operational aside from LPFA and Greater Manchester’s infrastructure vehicle, which has committed to £60m of investment so far.
Chief executive Hugh Grover has said he would welcome more funds joining the CIV, and that the vehicle would eventually offer in-house management.
Cardiff, Clwyd, Dyfed, Gwynedd, Powys, Rhondda Cynon Taf, Swansea and Torfaen have a long history of collaboration. They submitted a proposal for a vehicle of just £13bn, arguing it could achieve greater efficiencies, and more quickly, than an arrangement involving more funds. It is not yet clear whether the government will accept this proposal, force the pool to partner with another pool or order the Welsh funds to disperse and find alternative pools individually in order to meet its scale requirement.