A capital example to follow
Elizabeth Pfeuti talks to Mike Taylor, chief executive of the London Pensions Fund Authority, about taking a stance on ESG issues and dealing with longevity
An investment strategy overhaul is never an easy task, so coupled with the credit crisis and the implementation of a new Local Government Pension Scheme (LGPS), in the last 12 months the London Pensions Fund Authority (LPFA) has had quite a job to tackle its reinvention.
Established in 1989, the LPFA is one of the largest local government funds in the UK, with £3.8bn in assets under management. It caters for 73,000 members working for seven local authorities with over 200 public sector employers in the capital.
The organisation is also responsible for the pension fund administration of several other London boroughs and service providers affecting a further 120,000 people. Mike Taylor was appointed chief executive in September 2006 from a background in local government finance. Since that time the fund has undergone a rapid transformation and become one of the most well diversified funds in the UK.
Organisation
Taylor explained how the LPFA worked: "The money managed by the LPFA has been divided into two funds, the active return seeking fund, worth around £2.5bn, for active members, and the pensioner fund for retired employees of legacy London public sector organisations."
With regards to the active return seeking portfolio, Taylor stated: "We believe the majority of these assets should be in global equities and underpinning that we are diversifying using alternative assets."
The fund has explored alpha and beta separation and allocated 20% to absolute return strategies which operate in a 'quasi hedge fund' way. Taylor clarified: "We try to pay as little as possible for beta and only pay performance related fees on alpha. We're not prepared to pay two and 20 when a large element of the performance is beta." Some 25% has been dispersed over other alternatives including 7% in real estate.
Taylor suggested the LPFA was the first local authority to invest in global property rather than a fund weighted heavily to the UK, US and Europe.
"A couple of months ago we boosted the alternatives segment from 15% to 25% primarily to accommodate the global property infrastructure and private equity allocations." In line with most investors, the credit crisis hit the fund's global equities allocation, so the additional 10% was pulled from there.
An ethical standpoint
When Taylor spoke at the UK's National Association of Pension Funds (NAPF) conference in Edinburgh in March, he highlighted the difference institutional investors could make to the climate change effort. This viewpoint has been reflected in the fund's remaining alternative allocation.
Taylor said: "We want our investments to help mitigate the effects of climate change and reduce carbon emissions. That is partly why we've invested quite a lot in clean tech but also we have done a carbon footprint analysis of our equity funds."
The fund's alternatives selection also includes commodities and active currency, along with overlay strategies and timberland. "About a year ago we started discussing this with our managers and now when we enter a tendering process we would pre-qualify them based on their environmental, social and governance (ESG) credentials," Taylor added.
By September, Taylor said the fund would have an investment manager who would take responsibility for ESG issues. "We will endeavour to have a higher profile on these matters. Currently we think we talk a good talk, but we are not sure we are actually achieving a great deal. With an additional appointment we may do that."
The fund has not applied an ethical screen to its investments, preferring to engage with companies and get involved with campaigns, such as the UNPRI and Carbon Disclosure Project. Taylor said the fund would be looking for more opportunistic investment citing distressed credit as an option.
The LPFA has looked to international contemporaries for investment inspiration and has moved away from a heavy UK weighting, which would traditionally have stood at around 50% for a local authority fund, to 11% in line with a global benchmark.
"When we look at other funds, we compare ourselves with the major overseas funds such as APG, the AP funds and some of the large North American ones," Taylor said. "We also work closely with some of the bigger funds in the LGPS (Merseyside, Strathclyde, West Midlands) - we see each other regularly and compare what we're all up to."
Unusually for a fund with mostly externally managed assets, the LPFA has an investment director who is effectively a manager of managers. Vanessa James joined the fund a year ago and has led the alternative asset selection and oversees all investments. James' role has been to research and advise the committee on the allocation of assets and appointment of external managers.
It is this area of pension fund management that needs reform, according to Taylor: "The size of the pension fund in most local authorities which look after their own is much bigger than their turnover. This was not the case ten to 15 years ago when it would have been half of that.
"Apart from the larger authorities, I don't think there is enough time spent managing the pension fund." He explained this was partly due to pension fund authorities being mandated to manage their own pension funds by the national government, which was yet to realise it did not make sense to have 99 separate funds across the country.
The pensioner fund
The pensioner fund has been set up very differently. As a very mature fund with no active members, the committee decided this fund would be run on a liability driven investment (LDI) strategy.
Taylor said this part of the scheme had posed the most problems over the last year: "With the Pensioner Fund, we've swapped out our interest rate and our inflation risk. The cost of the swaps tends to be Libor. Our managers have found it increasingly difficult to outperform Libor with spreads being up to 1% at times.
"However, we are approaching this as a waiting game - we're certainly not going to sell out at the bottom. We're a long term investor - our liabilities last a very long time," he added.
Longevity has been cited as the biggest challenge to the Pensioner Fund over the coming years (and to a lesser extent the return seeking fund) with its oldest retired member drawing benefits aged 109 years. The fund has 43 members over the age of 100, a 30% increase on the 33 centenarians drawing on it six months ago. Taylor said: "Here we have the fundamental question: do you put public sector money into caring for old people or into their pensions?"
Class action
As one of the major UK pension funds with substantial assets invested globally, it stands to reason the LPFA has been involved with class action cases in the US, even taking lead plaintiff status on some occasions.
Taylor said: "We certainly keep an eye on class actions and if there are cases where we could claim money as it's a free lunch. "We are not currently leading on anything as there is a bit too much ambulance chasing on it and we would rather be involved in things that are promoting better governance, rather than just chasing money."
Local Government Pension Scheme
The LGPS, which was unveiled in April and sets out different contribution rates based on pay, was met with criticism from many corners of the public sector. The whole sector has been involved in debates about cost sharing, which, the pensions minister has said, is the quid quo pro of the scheme continuing.
Taylor said the big issue was if it would be sustainable for the future: "I don't think many people have understood the implications, which are forever increasing employer contributions. "There's a balance to be drawn there between maintaining a large number of members in the scheme, because that's what pension schemes are all about, or making it too expensive and pricing people out of it."
Taylor concluded: "The government has to think very carefully about what its objectives are here and who it's trying to attract. "It's going to be an issue for every LGPS member."
Established in 1989, the LPFA is one of the largest local government funds in the UK, with £3.8bn in assets under management. It caters for 73,000 members working for seven local authorities with over 200 public sector employers in the capital.
The organisation is also responsible for the pension fund administration of several other London boroughs and service providers affecting a further 120,000 people. Mike Taylor was appointed chief executive in September 2006 from a background in local government finance. Since that time the fund has undergone a rapid transformation and become one of the most well diversified funds in the UK.
Organisation
Taylor explained how the LPFA worked: "The money managed by the LPFA has been divided into two funds, the active return seeking fund, worth around £2.5bn, for active members, and the pensioner fund for retired employees of legacy London public sector organisations."
With regards to the active return seeking portfolio, Taylor stated: "We believe the majority of these assets should be in global equities and underpinning that we are diversifying using alternative assets."
The fund has explored alpha and beta separation and allocated 20% to absolute return strategies which operate in a 'quasi hedge fund' way. Taylor clarified: "We try to pay as little as possible for beta and only pay performance related fees on alpha. We're not prepared to pay two and 20 when a large element of the performance is beta." Some 25% has been dispersed over other alternatives including 7% in real estate.
Taylor suggested the LPFA was the first local authority to invest in global property rather than a fund weighted heavily to the UK, US and Europe.
"A couple of months ago we boosted the alternatives segment from 15% to 25% primarily to accommodate the global property infrastructure and private equity allocations." In line with most investors, the credit crisis hit the fund's global equities allocation, so the additional 10% was pulled from there.
An ethical standpoint
When Taylor spoke at the UK's National Association of Pension Funds (NAPF) conference in Edinburgh in March, he highlighted the difference institutional investors could make to the climate change effort. This viewpoint has been reflected in the fund's remaining alternative allocation.
Taylor said: "We want our investments to help mitigate the effects of climate change and reduce carbon emissions. That is partly why we've invested quite a lot in clean tech but also we have done a carbon footprint analysis of our equity funds."
The fund's alternatives selection also includes commodities and active currency, along with overlay strategies and timberland. "About a year ago we started discussing this with our managers and now when we enter a tendering process we would pre-qualify them based on their environmental, social and governance (ESG) credentials," Taylor added.
By September, Taylor said the fund would have an investment manager who would take responsibility for ESG issues. "We will endeavour to have a higher profile on these matters. Currently we think we talk a good talk, but we are not sure we are actually achieving a great deal. With an additional appointment we may do that."
The fund has not applied an ethical screen to its investments, preferring to engage with companies and get involved with campaigns, such as the UNPRI and Carbon Disclosure Project. Taylor said the fund would be looking for more opportunistic investment citing distressed credit as an option.
The LPFA has looked to international contemporaries for investment inspiration and has moved away from a heavy UK weighting, which would traditionally have stood at around 50% for a local authority fund, to 11% in line with a global benchmark.
"When we look at other funds, we compare ourselves with the major overseas funds such as APG, the AP funds and some of the large North American ones," Taylor said. "We also work closely with some of the bigger funds in the LGPS (Merseyside, Strathclyde, West Midlands) - we see each other regularly and compare what we're all up to."
Unusually for a fund with mostly externally managed assets, the LPFA has an investment director who is effectively a manager of managers. Vanessa James joined the fund a year ago and has led the alternative asset selection and oversees all investments. James' role has been to research and advise the committee on the allocation of assets and appointment of external managers.
It is this area of pension fund management that needs reform, according to Taylor: "The size of the pension fund in most local authorities which look after their own is much bigger than their turnover. This was not the case ten to 15 years ago when it would have been half of that.
"Apart from the larger authorities, I don't think there is enough time spent managing the pension fund." He explained this was partly due to pension fund authorities being mandated to manage their own pension funds by the national government, which was yet to realise it did not make sense to have 99 separate funds across the country.
The pensioner fund
The pensioner fund has been set up very differently. As a very mature fund with no active members, the committee decided this fund would be run on a liability driven investment (LDI) strategy.
Taylor said this part of the scheme had posed the most problems over the last year: "With the Pensioner Fund, we've swapped out our interest rate and our inflation risk. The cost of the swaps tends to be Libor. Our managers have found it increasingly difficult to outperform Libor with spreads being up to 1% at times.
"However, we are approaching this as a waiting game - we're certainly not going to sell out at the bottom. We're a long term investor - our liabilities last a very long time," he added.
Longevity has been cited as the biggest challenge to the Pensioner Fund over the coming years (and to a lesser extent the return seeking fund) with its oldest retired member drawing benefits aged 109 years. The fund has 43 members over the age of 100, a 30% increase on the 33 centenarians drawing on it six months ago. Taylor said: "Here we have the fundamental question: do you put public sector money into caring for old people or into their pensions?"
Class action
As one of the major UK pension funds with substantial assets invested globally, it stands to reason the LPFA has been involved with class action cases in the US, even taking lead plaintiff status on some occasions.
Taylor said: "We certainly keep an eye on class actions and if there are cases where we could claim money as it's a free lunch. "We are not currently leading on anything as there is a bit too much ambulance chasing on it and we would rather be involved in things that are promoting better governance, rather than just chasing money."
Local Government Pension Scheme
The LGPS, which was unveiled in April and sets out different contribution rates based on pay, was met with criticism from many corners of the public sector. The whole sector has been involved in debates about cost sharing, which, the pensions minister has said, is the quid quo pro of the scheme continuing.
Taylor said the big issue was if it would be sustainable for the future: "I don't think many people have understood the implications, which are forever increasing employer contributions. "There's a balance to be drawn there between maintaining a large number of members in the scheme, because that's what pension schemes are all about, or making it too expensive and pricing people out of it."
Taylor concluded: "The government has to think very carefully about what its objectives are here and who it's trying to attract. "It's going to be an issue for every LGPS member."
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