Counties in England and Wales and some other local government bodies had, until recently, largely held their own pension funds – all 89 of them – in the Local Government Pension Scheme. The fund had an estimated £200 billion in assets ($255 billion; €299 billion).
An exhaustive report into public pension provision by the Independent Public Service Pensions Commission was published in 2011. Its call to raise the retirement age from 65 to 68 after 2020 was what hit the headlines, but it also recommended that the system be restructured to improve transparency, boost returns and bring down administration costs.
Chancellor George Osborne got the ball rolling in 2015 when he called for a mass merger that would create six large pools of assets valued at roughly £25 billion each. He expressed hope that as well as achieving significant cost savings, the mega-funds would make it easier to launch investments in the big infrastructure projects that the UK needs. After more than a year of consultation, the 89 funds have been merged into eight: London CIV, Northern Pool, Central, Brunel, ACCESS, Wales, Border to Coast and LPP.
While liquid assets were transferred wholesale, the eight funds seem to have slightly different approaches to private equity and other illiquid assets. According to the initial proposals, a majority are choosing to keep these assets outside the main pool, run them down naturally and then make future PE investments with pooled capital. Some are putting their alternatives assets straight in with their listed holdings, while others are looking to hold their illiquid assets and continue investments from an external vehicle, at least for the foreseeable future.
From the investment manager's point of view, the changes mean new investments will be made via the pools, but with the local administration authorities retaining the power to make decisions on investment strategy and asset allocation. Investment managers, however, will be selected at pool-level to cut down on fees and administrative costs.
Two of the new entities, Northern Pool and Wales, have explicitely said reduced costs from pooling will allow them to move away from a relatively expensive fund of funds strategy towards making more co-investments and direct investments in private equity funds.
CLEARER ON COST
In line with the restructuring, the LGPS drew up a new cost transparency code for listed assets that it is now looking to replicate for alternatives. The aim is to iron out inconsistencies in the way costs are reported and to make them easier for pension scheme members to access and understand.
“We were looking at ways to make it easier for asset managers to deal with requests for information and to help clients aggregate all their data to go into the accounts,” a spokesman for the LGPS tells Private Equity International. “We've got a template that works for listed assets and we've got managers lined up to do that already. Now we are in the early phase of doing a similar thing for private equity. We are a little way off publishing anything yet but it's in the pipeline.”
According to a February report by the Investment Association, there is little evidence that just being a larger fund leads to improved returns. But with the LPP announcing that it is already saving £7.5 million a year as a result of pooling, initial signs are positive.
Encompassing the 33 funds of the local government pension funds administered by London's 32 boroughs and City of London Corporation, London CIV has £25 billion in assets. It will hold £700 million of illiquid assets outside the pool in the short to medium term, including £600 million in private equity assets, the equivalent of 2 percent in assets under management.
An amalgamation of the West Yorkshire, Greater Manchester and Merseyside, the Northern Pool contains £35 billion in pension assets. All assets, including private equity, will be transferred to the pool. Its administrators are planning to move away from a fund of funds strategy to investing in more single private equity funds and co-investments, enabled by the reduced costs of pooling.
The Central pool covers Cheshire, Leicestershire, Shropshire, Staffordshire, West Midlands, Derbyshire, Nottinghamshire, Worcestershire and the West Midlands Integrated Transport Authority. It holds £34 billion in assets. For now, alternatives assets will be managed by the pool but held outside of it, though this may change.
The joint smallest with £13 billion in assets, Wales contains the principality's eight existing funds: Carmarthenshire, Cardiff, Flintshire, Gwynedd, Powys, Rhondda Cynon Taff, Swansea and Torfaen. Illiquid assets such as private equity are being held outside the main pool on a run-off basis, with new investments made by the pool. Wales will take advantage of synergy savings to make more direct investments in private equity funds, rather than taking the “relatively expensive” fund of funds route.
Named after the great engineer Isambard Kingdom, Brunel contains the West Country pension funds of Avon, Cornwall, Devon, Dorset, Gloucester, Somerset and Wiltshire, those of Oxfordshire and Buckinghamshire, as well as the Environment Agency Pension Fund. It holds assets of £23 billion. The fund has transferred its existing private equity assets to the pool.
With £34 billion in assets, ACCESS brings together the pension funds of Northamptonshire, Cambridgeshire, East Sussex, Essex, Norfolk, the Isle of Wight, Hampshire, Kent, Hertfordshire, West Sussex and Suffolk. Alternative assets, which currently account for nearly 30 percent of the total, will be allowed to run off from a separate vehicle, with new investments made from the pool.
Border to Coast
The most geographically diverse and largest of the pools, with £36 billion in assets, Border to Coast contains the pension funds of Cumbria, East Riding, Surrey, Warwickshire, Lincolnshire, North Yorkshire, South Yorkshire, South Yorkshire Passenger Transport Pension Fund, Tyne & Wear, Durham, Bedfordshire, Northumberland and Teesside. Private equity assets will be held outside the pool on a run-off basis, with new investments made through the pool. Illiquid assets, including private equity and infrastructure, account for 22 percent of the total assets under management.
The London Pension Fund Authority, Berkshire and Lancashire combine to make LPP, the joint-smallest pool with £13 billion in assets. The fund holds £1.8 billion in private equity assets. These holdings are held in segregated accounts “better suited to the specific characteristics of the asset class”, LPP said in their pooling proposal, with the cost benefits of pooling accrued by the segregated accounts.