London Calling: LPFA's Truell on infrastructure and integration

London Pension Fund Authority’s infrastructure ambitions are focused firmly on the capital, writes Naomi Rainey

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London Pension Fund Authority (LPFA) chairman Edmund Truell's plans have been clear since his appointment from January 2013.

For Truell, the future of London's local government pension scheme (LGPS) funds lies in infrastructure, and the best opportunities are likely to be right on the doorstep.

Last week, LPFA announced three board appointments - Insight Investment chief executive Abdallah Nauphal and infrastructure experts Dermot ‘Skip' McMullen and Kerry Adby into the fold (PP Online, 18 April).

Truell says this will not just benefit LPFA's performance, but will drive towards the ultimate strategy of "conglomeration" of London's 34 existing funds, with infrastructure in particular playing a key role.

He says: "As we set out our stall to manage more assets, we need to be putting a lot of money into housing and other infrastructure to earn long-term real returns."

LPFA became a founding member of the National Association of Pension Funds (NAPF) and Pension Protection Fund's (PPF) Pension Infrastructure Platform (PIP) initiative earlier this year (PP Online, 18 February).

Truell says he would like the development of the already-delayed PIP "to get on a bit more quickly", but that its investment strategy is starting to take shape.

"It's likely to be in more brownfield and debt, rather than new projects. However, it's our intention to be a new project equities investor or owner, rather than just a debt provider," he explains.

While PIP is "very anxious" not to accept construction risk, Truell says LPFA is "more prepared to take on those risks and manage them properly".

With this in mind, in addition to LPFA's £100,000 contribution towards start-up costs and a soft commitment of £100m investment in the PIP fund, Truell says it will "absolutely" undertake its own infrastructure investment projects.

He explains: "We're very much aiming to take on large-scale projects as owner and commissioner."

While LPFA will "only be investing in things that make a decent return", there will be a strong preference for local projects, Truell says.

Truell argues the organisation's position as pension provider for the Greater London Authority (GLA) and London's status as capital of the UK makes a locally-focused strategy "positively reinforcing" for the fund.

He says: "We have a unique ability to work very closely with our key sponsor, the GLA.

"I see it as an enormous advantage, or at least risk mitigant, to talk on direct terms with the people in charge of planning aspects.

"There are massive risks which have delayed many projects. But if you can say, ‘are you going to build the Northern Line extension, yes or no?' it takes a big risk out of the project. Local knowledge and access is an enormous advantage.

"As London gets better infrastructure and is more attractive for business and so on, there'll be more people to pay levies into our pension fund."

Infrastructure investment goes hand-in-hand with LPFA's plans for consolidation of London's existing LGPS funds.

Truell says: "Undoubtedly having a bigger pool means that one can do bigger projects without becoming over-concentrated in any one particular deal."

LPFA's recently-bolstered expertise in liability and risk management, in the shape of Insight Investment chief executive Nauphal, also means the fund can offer access to knowledge and skills most LGPS funds are excluded from, according to Truell.

He says: "I don't think many of the London funds would claim to know much about the more esoteric means of reducing their risks on the liabilities side.

"Whether it is inflation hedging, liability hedging, longevity risk hedging, they bluntly don't know where to start. That's where a larger central pool can help considerably, in a cost effective way."

Truell's intentions to drive forward LPFA's consolidation ambitions have been clear from his appointment (PP Online, 18 December 2012) but they have not been without controversy.

In February, Wandsworth Council blasted LFPA's investment record and claimed a merger would be "disastrous" (PP Online, 15 March).

Truell admits LPFA's performance may not have been "world class" historically, but says changes in the organisation have redressed this. Furthermore, Truell says the potential savings are "too big a prize to sacrifice over complaints about localism".

He explains: "PwC and Cass Business School suggested £10m of savings could be made from administration annually. We estimate the investment management cost savings as being £120m per year.

"Third parties are yet to put a figure on the benefits of risk reduction, but the LPFA just crystalised £178m profit on an interest rate hedging programme.

"All over the world there are studies that support larger funds. The latest one from London Business School suggested one would, over time, see over 0.5% per annum better investment returns.

"When you apply that to more than £40bn, it would be the equivalent of paying for the Olympics, or another Crossrail."

Despite this, Truell says he has "sympathy" to some arguments from the naysayers, such as town hall accountability. In his eyes, councils would retain their pension boards with local control.

He says: "Those trustees should be persuaded to give a wholehearted asset, liability and administrative management contract to the central fund."

Truell is not concerned with winning over the detractors, instead wishing to focus on those funds who do want to explore collaboration.

"We've had approaches from some very big public sector funds that do want to do it, and not necessarily just London boroughs," he explains.

"Don't waste too much time on the people who don't want to do it. If the turkey doesn't want to vote for Christmas, forget about it, leave it to one side. The sensible people do want to do it."

He adds: "If we can start to demonstrate that conglomeration and world-class management brings benefits, it will become self-evident. I prefer to lead by example with the people who wish to be led, rather than indulging too much handbag swinging."

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