Pension Funds

U.K. pools offer major opportunities

The need to transition billions of dollars in assets on behalf of England and Wales' local government pension scheme funds into eight pools presents a significant opportunity to service providers.

These funds, which collectively invest about 218 billion ($305.8 billion) in assets, are well into the thinking stage of who to use for transitions, but many have not yet made their decisions. In January, the National LGPS Procurement Frameworks — a collaboration among LGPS funds — appointed a group of nine firms that the funds could turn to for help in finding a transition manager or a firm to monitor and advise on these managers.

The providers are taking notice.

"Instead of (transition management players) focused on the investment banking community, we've started to see some of the asset managers (build) out their existing business" to provide transition services, said Mark Mansley, chief investment officer at the 28 billion Brunel Pension Partnership, Bristol, England. "There is also a sense that probably (transition managers) may add a little bit more value than they used to — trading has got more complicated in recent years, so having someone to help you through the process is a good plus."

Transition management is "quite an interesting commercial area," added Alexander Younger, investment and accountancy services manager at the 2.9 billion Norfolk County Council Pension Fund, Norwich, England, which is part of the 32 billion ACCESS pool. "There is still a playing field from which to make a choice. There are some opportunities out there, and one would imagine the fluid nature of this world means the opportunity to work alongside a pool is not just short term. People inevitably will be restructuring assets as liabilities and funding levels change."

Executives "would expect (transition managers) to be keen on fees and high on quality. Those players still in the market are pretty keen to be involved," added Mr. Younger.

Despite change in recent years for the transition management industry, with increased scrutiny on providers because of transparency and other concerns in the past, this has been a good thing as it has "increased awareness of the importance of business model and culture," said Mirjam Klijnsma, head of implementation services, Europe, Middle East and Africa at Russell Investments Group LLC, in London. "An increased focus on transparency has also raised awareness that lowest explicit cost does not necessarily always mean best outcome for the investor."

She added the industry remains "a very competitive one, but given the size and complexity of the transitions forthcoming within LGPS and the subsequent scrutiny that is inevitable, it will also be very important for LGPS (pools) to ensure that their chosen transition partner has the right business model" so the pools' interests are put ahead of those of the transition managers.

Craig Blackbourn, head of transition management for EMEA at Northern Trust Capital Markets in London, added: "Schemes and the pool operators find themselves at a crossroads, where scrutiny of the various business models is required. Should size of provider be a determining factor, where schemes are obliged to operate in a one-size-fits-all model, or is adaptability and flexibility more important to the LGPS?" he said.

And providers should keep in mind some considerations specific to the LGPS transitions, said John Harrison, interim chief investment officer at the 43 billion Border to Coast Pensions Partnership, South Shields, England. "We are aware that every one of the participating authorities has identified transition as a significant potential risk for them, and therefore one of the additional complexities ... is the information flow that is needed to the various participating authorities. In our case that's 12, so a lot of communication is needed between the asset pool and authorities. We need to identify what needs to be done, how it is most effectively done, and probably just as important how we can keep a tab on whether it is done in the way (individual funds) thought it would be," said Mr. Harrison. "There needs to be an openness about it, but at the same time you don't want to give information away which causes the market to move against you."