Executives at two U.K. pension funds are spending the summer preparing their application to the Financial Conduct Authority for authorization to create a more than £10 billion ($15.5 billion) asset and liability management partnership, a move one fund CEO anticipates will bring more assets in-house.
This month, the London Pensions Fund Authority, with £4.9 billion of assets, and the Lancashire County Pension Fund, with £5.2 billion of assets, said they will go ahead with the Lancashire and London Pensions Partnership, aiming for a start in April 2016.
Cost savings and increased investment opportunities through scale are two aims in the collaboration. Executives at the funds anticipate combined savings “in excess of £32 million (over the next five years) — that is just what we can do with some of the fees and taking management in-house,” said Susan Martin, CEO at LPFA, in an exclusive interview at the pension fund’s office in London. “We are confident we can do more than that. From a business case, it was self-evident that this is going to save money. We are doing this to save money, close the funding gap, (and) provide better service for employers and members.” LPFA is 92% funded.
To achieve these aims, executives anticipate adding staff as in-house capabilities expand.
The collaboration will cover all aspects of pension fund management, and will become — if authorization is granted by the U.K.’s FCA — a fully fledged pension service organization. The two funds will retain their separate identities and local accountability while having jointly managed administration and pooled asset and liability management. The hope is that these services eventually will be extended to other Local Government Pension Scheme funds.
Ms. Martin became CEO of LPFA in December 2013. She began informal talks with executives at a number of LGPS member funds “very early last year,” while Lancashire executives were talking to others, too. “It became apparent toward mid-last year … and became clear this was the appropriate tie-in. We announced in December, but had done a lot of work beforehand to sound each other out.”
Things are moving fast. Last week, the two pension funds launched a search for a provider of global custody and other services. They also started looking for an independent chairperson and non-executive directors.
Gaining FCA authorization — LLPP is aiming for November application — is a huge piece of work. “We have to set up a depository, create a five-year business plan, (fill out) compliance documents … that has been helped by the fact that LPFA, in the early part of last year, went through a mock FCA process. And we got a big tick from that. We are using it and translating it into this partnership. But it is a huge task,” said Ms. Martin.
The development of LLPP comes at a time when the local authority pension fund landscape is in a state of flux. The industry is awaiting the results of a comment paper, published May 2014 by the U.K. government, examining future of the 89 pension funds, and about £180 billion of assets.
“I don’t anticipate anything will derail us (as a result of the comment paper). We have been working closely with the Department of Communities and Local Government, and offer what we have learned through this process to others. We don’t believe that this is the only game in town — but it is the right approach for our two funds, and for others should they wish to join us,” said Ms. Martin.