The announcement that certain public sector pension fund assets in the U.K. will be pooled into six wealth funds has left pension fund executives and consultants perplexed — at least regarding the timing.
It’s been known since 2013 that the U.K. government was looking to pool the assets of England and Wales’ 89 local government pension scheme funds, known as LGPS, but little detail — beyond a call for proposals — has emerged. That changed Oct. 5, when George Osborne, the U.K.’s chancellor of the exchequer, said at the Conservative Party’s annual conference in Manchester, England, that the funds would be pooled to create six British wealth funds.
“It was a little surprising that Mr. Osborne chose to make the announcement that he did (Oct. 5),” said Linda Selman, partner and head of LGPS investments at Hymans Robertson LLP. “We were a little surprised at the wording, and I think funds were as well.”
The surprise came because the pension industry and providers had been waiting for the U.K. government to release details in November, specifying pooling criteria for LGPS, said a pension fund executive, who requested anonymity. “Regional funds seem to be (Mr. Osborne’s) preferred option. His announcement could suggest that … the decision is already taken. That being said, a lot of work is going on to assess the preferred options to take forward.”
Several initiatives are well underway. The £2.1 billion Dorset County Pension Fund, Dorchester, England, is part of a group of eight LGPS in the South West England, which have been working on a common investment vehicle. The pension funds have been collaborating on investment and fund administration since 2007. The group has about £19 billion ($29.40 billion) of assets.
“Whilst his announcement has been an unwelcome distraction from the work that we have been doing, we have been advised by government officials that there has not been a change of policy since the summer budget announcement (that there would be some kind of pooled arrangement, and pension funds should prepare proposals for how they could be pooled,) and that is should not mean that we stop,” said Nick Buckland, head of treasury and pensions at the Dorset pension fund. He said the government is still looking for pooling proposals from the sector.
Another member of the South West group is the £3.1 billion Devon County Council Pension Fund, Exeter, England. Mark Gayler, assistant county treasurer, investments and treasury management within the investments team at Devon County Council, said: “Our understanding of the announcement by George Osborne is that it is the same policy that we are already aware of re: pooling of LGPS fund investment.” He said that if the South West collective investment vehicle progresses, “it would be one of the funds the government is looking for.”
A spokesman for the £4.9 billion London Pension Funds Authority, London, which is involved in an asset and liability management partnership with the £5.2 billion Lancashire County Pension Fund, Preston, said: “We are already well underway in forming partnerships with other funds.” He added that despite the existing partnership comprising around £10 billion of assets — well under the chancellor’s targeted £25 billion for each of the British wealth funds — “we plan to grow (that partnership) to £40 billion in time, exceeding the chancellor’s figure.” The partnership, the London and Lancashire Pensions Partnership, announced last week that it had chosen Michael O’Higgins, former chairman of the Pensions Regulator, as its chairman.
The pension executive who requested anonymity, said: “It’s going to happen, it’s going to be drastic in terms of changes to the status quo.” However, he questioned the government’s predictions that cost savings could amount to about £660 million a year under certain changes, such as transitioning current actively managed listed assets to passive management.
“The chancellor’s cost savings would seem to be overestimated by a degree of double counting. A report he commissioned suggested that passive management achieved similar returns to active management (after costs.) It also said that passive management had lower turnover and therefore lower transaction costs than active management. It seems that the potential fee savings and lower transaction costs were simply added to come up with a potential saving,” he said.
However, these figures are not mutually exclusive, because active returns include transaction costs. “If you move to passive, you save on active fees but lower transaction costs are already baked in — you can’t add them on as well.”
Andrew Kirton, London-based EuroPac investments leader at Mercer Investments, agreed that some of the cost savings are “illusionary.”
Another proposal was to move to a common investment vehicle for alternative asset allocation, from the current use of funds of funds. “There will be savings … but some of us are doing that already — so any further savings from aggregation are far more modest,” said the pension fund executive.
But the lack of detail from the government is a potential problem for these and other groupings. “The impression we have is that it is good to have investigated what you could do as a group, but it probably isn’t wise to go ahead and implement anything until the government has said it is happy with it,” said Ms. Selman.