London and Lancashire pensions hunt for more partners

The Lancashire County Pension Fund and the London Pensions Fund Authority, which have already agreed to combined their £11bn assets, are talking with other schemes to achieve critical mass.

The Lancashire County Pension Fund (LCPF) and the London Pensions Fund Authority (LPFA), which are combining assets and liabilities totalling £11 billion ($15.7 billion; €14.1 billion), have held discussions with other local government pension schemes (LGPS) about joining their asset pool.

The two pension funds, which will launch their Asset Liability Management (ALM) partnership in April as the Local Pensions Partnership, have been in discussions with the Greater Manchester Pension Fund, Merseyside Pension Fund and the West Yorkshire Pension Fund, the LPFA chairman Merrick Cockell wrote in a letter responding to a UK government request for asset pooling proposals.

The three other pension schemes have combined assets of about £35 billion. The group is putting together a proposal on “how the pooling arrangement will work” and the LPFA expects discussions to reach a “successful conclusion”.

The government has instructed the 90 local government pension schemes (LGPS) to combine assets totalling at least £25 billion “to achieve cost savings and benefits of scale”. In November, it requested schemes submit proposals outlining their commitment to pooling assets and their progress made.

“Asset pooling will also enable administering authorities to improve their capacity and capability to invest in large scale infrastructure projects,” the department of communities and local government said.

The LCPF and LPFA have also held “early discussions” with other funds, specifically the Royal County of Berkshire Pension Fund, which it hopes to add to group above, Cockell wrote.

The two pension funds “recognise the ALM Partnership will be required to expand its pool to achieve government’s target criteria”, he wrote.

The criteria for combining assets includes size, governance, cost savings and improved ability to invest in infrastructure. The paper describing the investment reform criteria and guidance was accompanied by a report prepared by PwC outlining the design and governance of “efficient and effective” collective investment vehicles for LGPS funds.

The Local Pensions Partnership expects to start pooling assets in April, Cockell wrote. Its structure allows other pensions to join and pool assets, the pension funds to retain their sovereignty and control of strategic decisions such as employer contribution rates and asset allocation, and will also accommodate illiquid assets, such as infrastructure, real estate and other alternatives.

The partnership expects to save at least £30 million in fees over the next five years. The two pension schemes have already spent £1.5 million to set up the asset pool.

“The scale of commitment required to get this type of arrangement off the ground is not to be underestimated, and we have been happy to share our learning with colleagues from other funds even when they are seeking to create alternative pools,” Cockell wrote.

Its pooled assets will include infrastructure investments, which “will remain an important asset class”. The partnership is actively pursuing opportunities in the UK and Europe and would look to include other local government pension schemes as investors.

“The combined pool of talent within the ALM Partnership will enable us to build a sustainable team experienced in the ongoing management of direct infrastructure investments, as well as the initial acquisition,” Cockell wrote.

LGPS were due to submit initial asset pooling proposals to the government by 19 February, with completed submissions due by 15 July. They are expected to start pooling liquid assets from April 2018.