Edi Truell on pension consolidation

The UK government’s announcement on 5 October of plans to pool the assets of 89 local authority pension funds is a step toward creating the nearest thing the country has to a sovereign wealth fund.

It will result in six British wealth funds, each with assets of about £25 billion ($38 billion; €34 billion), and save “millions of pounds every year” in costs and fees, the Treasury claimed.

Significantly, the new funds have been given a mandate to develop the expertise to invest in infrastructure. The move coincides with the creation of a National Infrastructure Commission which will assess the UK’s long-term infrastructure needs.

In response to the government’s announcement, the newly-appointed chairman of the London Pensions Fund Authority (LPFA), Merrick Cockell, noted that it had been calling on the government “for some time” to “take in to account the resources of the LGPS [Local Government Pension Scheme] and invite UK funds to invest in these UK projects”.

The LPFA is “already well underway in forming partnerships with other funds”, Merrick said, referring to the LPFA and Lancashire County Pension Fund initiative launched in July to form the Lancashire and London Pension Partnership (LLPP) with £10 billion of pooled assets and liabilities under management.

The LPFA has previously partnered with Greater Manchester Pension Fund to form a £500 million infrastructure investment platform.

But the implications go further than roads and buildings. The UK is, at last it seems, making a concerted push for local authority pension funds to develop the investment capacity wielded by other public pension funds including Dutch, Scandinavian, US and Canadian counterparts, which, in addition to infrastructure, invest in other alternatives including private equity funds and direct and co-investments. Merrick’s predecessor at the LPFA, former private equity founding partner and now the Mayor of London’s pensions and investment advisor, Edi Truell, is a long-term champion of UK pension fund consolidation and a strong advocate for increasing public pension fund exposure to private assets.

Truell’s thesis is that the myriad of UK public authority and public sector pension funds are costly to run, inefficient and in deficit. For the UK public sector as a whole, an increase in annual employer pension contributions of at least £50 billion per annum is required to meet the shortfall, he wrote in a green paper submitted to the Treasury in late September.

Improved asset and liability management and a focus on illiquid assets, such as infrastructure and private equity, “should provide many billions of additional net returns and reduce volatility”, Truell wrote. In the same document, he called for the creation of “citizen wealth fund(s)”.

He seems to have been heard.The Treasury’s announcement is a demonstration of the political will Truell has been calling for to strong-arm funds to combine. Merging funds is not without controversy or resistance, not least from the funds themselves.

“It’s a great tribute to Lancashire’s Jenny Mein that she had the faith to join forces with London,” Truell noted of the leader of Lancashire County Council in an interview with Private Equity International prior to the government’s announcement.

It seems that the government has forced on other local authorities the “hard choices” Truell said would need to be made in order for pension funds to share functions, cut costs and create scale.

The creation of the LLPP with its combined administration and shared investment team is expected to save £75 million in costs over the next five years. It could be joined by the likes of the London Collective Investment Vehicle representing the pooled assets of 12 London boroughs, Truell said.

MISTAKEN VIEW

Truell, who established Duke Street Capital in 1998, before selling out in 2007 to establish the Pension Insurance Corporation, now heads the Strategic Investment Advisory Board (SIAB) established to guide the LLPP and any other public sector pension fund that seeks its advice.

Mirroring allocations the LPFA made under Truell’s stewardship, the LLPP plans to invest about half its portfolio in illiquid assets, including infrastructure, real estate, private equity funds, secondary and direct investments, private debt and a bucket for other real assets such as timber. The SIAB is building its own infrastructure team, which may be used by the LLPP.

“There’s a mistaken view of safety and liquidity,” Truell said. “Pension funds don’t need to be liquid. And then there’s safety. Gilts pay 2 percent a year and inflation is expected to be higher than that. That safely guarantees bankruptcy. Pension funds are under water, and if you project the liabilities there is a £1.7 trillion deficit across public sector pensions in the UK.”

The LLPP has plans to reduce its exposure to funds of funds and up its participation in direct and co-investments, as reported previously by PEI. Truell maintains that “co-investment is expensive but it is much cheaper than investing through funds of funds”.

Truell highlights the LPFA’s housing scheme at Pontoon Dock, east London, as an example of the potential of a switch toward more illiquid investments. The fund provided 85 percent of the financing for a project launched in September 2014 to build more than 200 housing units in the area. Such an asset will yield returns over time and keep pace with inflation, he noted.

The Pontoon Dock development is a stone’s throw from London City Airport, which is currently up for sale. Among the bidders for the asset owned by Global Infrastructure Partners and Oaktree Capital is reported to be Ontario Teachers’ Pension Plan, in partnership with a Kuwaiti sovereign wealth fund and investment firm Hermes.

It is a source of frustration for Truell that no UK public pension fund has the investment capacity to match international funds, either in terms of internal resources or assets to acquire or develop significant projects. He points to The Shard real estate development by London Bridge financed by the Qatar Investment Authority. “Those that do are the Qataris, Singapore, Malaysia, everybody but us.”

The creation of six British wealth funds is a strong signal of the political drive to do something about it. But there is still a long way to go.

“You need to be tens of billions in size to start to get really efficient,” Truell said, adding that even funds of that size still would not be big enough to participate in projects such as the proposed second phase of London’s Crossrail project that is expected to cost about £18 billion. “If you are £500 billion you can do it.”

A £500 billion fund is equivalent to 50 LLPPs. It is a sobering comparison.