Last week, two UK pension plans, each with assets of around $7 billion, entered an agreement to pool their assets and invest as one entity.
Officials say the partnership will lead to lower investment costs and stronger governance. But what will the partnership look like?
Chief Investment Officer found out:
Under the proposed new agreement, each fund would remain responsible for its own liabilities but the asset management would be pooled.
“Both funds have a similar investment philosophy,” says Susan Martin, CEO of the LPFA. “We have a joint aspiration to close our funding gap.”
The basis for this relationship lies in bringing more assets to be managed in-house, both sides say.
“It gives us better governance, lower costs, more efficiency, and better control over execution,” says Martin. “There will be a joint committee that is responsible to both funds, on which a representative from each will sit as they will understand the cash flow required.”
Each fund already has a substantial in-house investment team, but approval from the FCA will mean the partners can carry out a range of investment activities that had previously been accessible to them only through asset managers and other providers.
Clearly, the move would see several fund managers lose their mandate.
“We need to look in detail at each fund,” says Graham. “There might be funds and some managers that can be merged or pooled or we could run some in parallel for a time.”
Graham also has ambitions that push outside the strict boundaries of the pension.
“In creating our own investment manager and partnering with LPFA we are mitigating risk,” he says. “We can begin training people up and start succession planning. We could have a centre of excellence for finance in the North West of England.”
More background on the partnership, from Ai-CIO.com:
“We believe in greater collaboration, so this is really putting our money where our mouth is,” says Lancashire County Council Deputy Treasurer George Graham.
Graham is speaking to CIO on the day the £5 billion local authority pension announced it had agreed—in principle—to tie up with one of its peers based 300 miles away in the UK capital, the $5 billion London Pensions Fund Authority (LPFA).
“We have a broad agreement about the shape of something and now we will sit down with lawyers and the Financial Conduct Authority (FCA) to come up with something that suits both funds and to which we can both formally agree,” says Graham. “We have been in talks about this since the late summer.”
The funds have collective assets of £10 billion and want to bring the majority of them under their own auspices. Along with a joint belief in self-management, the funds are against a push from central government towards public pension funds being managed purely on a passive basis. It would be a “backwards step”, according to Graham, and would work against the efforts each team has been doing to manage its own assets and liabilities.
The pension funds say that they would be receptive if other pension funds were interested in joining the partnership.
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