The LGPS funds have sent their full proposals for pooling to the government. Stephanie Baxter looks at the final details of the eight pools.
At a glance
- Funds had to submit detailed pooling plans to government by 15 July
- Eight pools of various sizes, most using the ACS structure
Just over a year has passed since the now ex-chancellor George Osborne revealed funds in the local government pension scheme (LGPS) would have to pool their investments.
After submitting initial plans in February following months of discussions with the government, the final detailed proposals were sent by 15 July. They show exactly how each of the eight pools plan to meet the government's aims of reducing costs and increasing investment in infrastructure.
The pooling announcement in last year's summer budget came as a shock and led to concerns about the LGPS's future. The funds should be praised for the way they have come together to meet the tight deadlines when they are already dealing with a raft of major reforms introduced over the past few years.
The government is expected to give confirmation in October for funds to go ahead with their proposals, with a view to formally pool assets from April 2018.
Here are some of the main details of the final eight pools that will all be regulated by the Financial Conduct Authority (FCA):
Funds: Northamptonshire, Cambridgeshire, Essex, Norfolk, Isle of Wight, Hampshire, Kent, Hertfordshire, West Sussex and Suffolk.
Structure: Pool composed of an FCA-authorised collective investment vehicle (CIV). The operator and authorised contractual scheme (ACS) and other pooled investment vehicles will hold assets. The operator will be responsible for selecting and contracting with managers on behalf of the authorities. A joint governance committee will be established to hold the operator to account.
Direct property investment and operational cash will be held outside the pool permanently.
Funds have total 1.1% asset allocation to infrastructure currently and expect to increase to around 5% over the longer term.
Estimated savings: £30m annually. By year 10, it expects this to increase to £40m-50m annually. Plans for a quick win saving of £4m per annum by consolidating passive mandates.
Border to Coast Pensions Partnership (£35.9bn)
Funds: Cumbria, East Riding, Surrey, Warwickshire, Lincolnshire, North Yorkshire, South Yorkshire, South Yorkshire Passenger Transport Pension Fund, Tyne & Wear, Durham, Bedfordshire, Northumberland and Teesside.
Structure: A wholly-owned company, operating an FCA-regulated structure comprising of an alternative investment fund manager with an ACS, probably a Qualified Investor Scheme. Other legal structures would be used for illiquid assets. Concluded best governance structure is a joint committee to be hosted by one of the administering authorities.
Estimated savings: £27m annually by 2021, increasing to £55.2m by 2030 on a best case scenario basis (excluding set-up and ongoing costs of pool).
Brunel Pension Partnership (£23bn)
Funds: Avon, Cornwall, Devon, Dorset, Gloucester, Somerset and Wiltshire, Oxfordshire, Buckinghamshire and the Environment Agency Pension Fund.
Structure: FCA-regulated company will manage the asset pool, owned jointly by the 10 funds. Initially 22 portfolios have been identified to meet the needs of the funds. Choice of fund managers and structure of portfolios will be made by the Brunel company.
Estimated savings: Net savings to reach £13m per year by 2021 with potential to rise to £70m per year in the longer term through increased economies of scale and improved investment performance.
Central Pool (£34bn)
Funds: Cheshire, Leicestershire, Shropshire, Staffordshire, West Midlands, Derbyshire, Nottinghamshire, Worcestershire and the West Midlands Integrated Transport Authority.
Structure: FCA-regulated investment management company (operator) owned equally by the funds; will use an ACS and other legal structures for assets. A Shareholders' Forum will ensure the operator is managed in the interests of participating funds, and a Practitioners' Advisory Forum will enable their requirements.
Aims to increase infrastructure allocation to over 5% of assets.
Estimated savings: Over £200m by 2034, net of transition, set-up and operating costs.
Local Pension Partnership (£13bn)
Funds: Lancashire, Berkshire and the London Pension Fund Authority.
Structure: Asset and liability management partnership set up by LPFA and Lancashire last year. It already has FCA authorisation and in July set up a £1.2bn property fund to raise exposure to UK commercial and residential property.
Potential net savings of around £33m in investment management fees over five years, based on just Lancashire and LPFA's participation so far. Around £1m savings in administration costs in year two of operations. It anticipates improved investment outcomes of around £20m-£30m from current levels over the next five years.
London CIV (£25bn)
Funds: Established for the 33 LGPS funds administered by London's 32 boroughs and the City of London Corporation, but it is also open to the rest of the LGPS.
Structure: Established the first full scope alternative investment fund manager in local government, using the ACS structure, with FCA authorisation attained last November.
Some £2bn of assets have transitioned into its first three sub-funds and it is making over £1m per annum in fund manager fee savings.
Northern Pool (£35.4bn)
Funds: West Yorkshire, Greater Manchester and Merseyside.
Structure: It wants to adopt a segregated mandate approach after finding the ACS is not the most cost effective due to significant set-up costs. Will set up FCA-regulated investment company to operate as an alternative investment fund manager to allow pool to run CIVs in alternative asset classes. Each authority will own equal equity share capital in the company. The oversight board will be a joint committee.
All non-listed assets will be managed by the pool from April 2018. Listed assets will be held in segregated mandates but managed by the investment company.
Estimated annual savings of £28.3m by 2033, which represents an ongoing saving of 25%.
Total target allocation to infrastructure is 10%, compared to 4.5% currently.
Wales Investment Pool (£12.8bn)
Funds: Carmarthenshire, Cardiff, Flintshire, Gwynedd, Powys, Rhondda Cynon Taff, Swansea, and Torfaen.
Structure: The pool wants to use the CIV route, using the rental option whereby the pool will go to the market to find an operator to do the regulated part (whereas bigger pools are looking at the buy option). It will be governed by a joint committee. Some investments will be held outside the pool initially but the target is to have 95% of assets in the pool by 2021.
The funds have already made £1.5m-£2m in annual savings through a collective procurement for all passive investments. In April, BlackRock was appointed for the pool's £2.8bn collective passive mandate following a competitive tender. The next stage will be focused on the active management side.
Downgrades have slowed, but indications are that the trend has further to run
Morningstar Investment Management (MIM) has launched a range of three multi-asset funds that will blend active and passive strategies to offer advisers low-cost solutions.
In the first of a five-part series of articles for PP, pensions minister Guy Opperman sets out how impending legislation will improve pensions for members.
Tim Shepherd and Beth Brown look at the legal implications of working from home and how pension professionals can mitigate the risks.