Two UK Pensions Enter Investment Partnership – What Will It Look Like?

london

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.

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“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.

 

Photo by  @Doug88888 via Flickr CC License

The Case Against London Mayor’s Pension Proposal

Roadwork

London Mayor Boris Johnson wants to merge the country’s 39,000 public sector pension plans into one scheme, which would invest in building and updating the UK’s roads, airports, railroads and other infrastructure.

Yesterday, one of the UK’s largest pension funds, the London Pensions Fund Authority (LPFA), backed the idea.

But Sean O’Grady, economics editor of the Independent, offered a counter-point recently in his column. The bottom line, he says: “Sensible pension fund managers do not send their money where politicians tell them to.” From the column:

What most sensible pension fund managers do not do is send their cash to where politicians tell them to. If they do invest in the public sector, via PFI schemes, they do so via specialist companies and private equity vehicles who have worked out how to make money out of running prisons or trains. They do not do so directly.

There are good reasons for this. Let us take a few examples from history, “investment opportunities” presented as safe, prudent and lucrative ventures that successive governments poured taxpayers money into. The Millennium Dome; The Humber Bridge; Concorde; the NHS IT project; all vastly over budget, and an utter waste of money.

Or the Advanced Passenger Train and its unique “tilt” mechanism; cost £150m and never carried a single fare. Any and every block of 1960s high-rise flats that has since had to be dynamited, though the local authorities who built them are still paying off the debt. Nuclear power stations that promised electricity that would be too cheap to bother metering. Not to mention Boris’ glass testicle, by which I mean City Hall, as it has been renamed with cruel cockney humour.

Now of course there are worthy public projects that can earn a return for investors. The point is that the best people to decide on whether to invest your hard earned cash into such schemes are not the politicians who would like to get some votes off the back of them, but the investment managers we appoint to look after our cash. Private or public sector, would you really lend Boris Johnson your life savings so he can run a tube line to Bromley? I thought not.

The Mayor originally proposed his plan in a weekend op-ed in the Telegraph, which can be read here.

Major Pension Fund Backs London Mayor’s “Megafund” Idea

Boris Johnson

We covered yesterday the plan proposed by London Mayor Boris Johnson to merge the country’s 39,000 public sector pension plans into one scheme, which would invest in building and updating the UK’s roads, airports, railroads and other infrastructure.

Today, one of the UK’s largest pension funds has come out in support of the plan. From the Financial Times:

The £4.9bn London Pensions Fund Authority (LPFA) said it supported the London Mayor’s call for tens of thousands of public sector schemes to merge, with the money used for infrastructure investment.

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“The overhead costs of running a large number of pension funds can run into billions of pounds,” said Edmund Truell, chairman of the LPFA.

“We have been trying to go direct with our investments and cut the layers of costs. I would consider it ‘job done’ if we were absorbed into a sovereign wealth fund.”

Pension investment advisers said it was far from perfect that so many small funds manage their investments individually but they would be concerned about the creation of one enormous fund.

“Many local authority funds are too small to be able to make individual investments in alternative assets or to have a bespoke liability-driven risk management strategy,” said Ros Altmann, a pensions expert.

“However, I would be concerned about too much concentration as well and would prefer to see a number of large funds, not just one or two.”

The Mayor originally proposed his plan in a weekend op-ed in the Telegraph, which can be read here.

 

Photo By Andrew Parsons/ i-Images