Pension fund executives and global money managers take note: the U.K. government is further along in its mission to pool public-sector assets, potentially channeling billions of dollars of assets from externally managed allocations while cutting costs and creating efficiencies in the process.
This month, U.K. Chancellor of the Exchequer George Osborne announced further details of the government's ongoing quest to pool the assets of England and Wales' 89 local government pension schemes, the LGPS, which collectively have about £190 billion ($288.6 billion) of assets.
At the Conservative Party's annual conference, held in Manchester, England, Mr. Osborne said that he wants the assets pooled into six British wealth funds. The plan is that each will have at least £25 billion of assets, which will, in part, be allocated to U.K. infrastructure, he said.
Details on how assets will be pooled are yet to be revealed; more information is expected in November.
In a 2014 paper, the government estimated that pooling could save £660 million per year. In addition, the U.K.'s LGPS were asked in July to submit proposals on pooling of assets. A number of projects have emerged, and sources said there are plenty of examples from other parts of Europe, North America and Asia to look to for inspiration.
The plan has brought into sharp focus the potential effect on the global firms that provide investment management for these public-sector pension funds. About 16% of LGPS assets are internally managed in some way, sources said, meaning that third parties run the overwhelming majority of assets.
“Clearly the expectation from the government is that fees are going down, so that has an impact on fund managers,” said Linda Selman, Edinburgh-based partner and head of LGPS investments at Hymans Robertson LLP. “We would also expect that there is likely to be some consolidation of mandates — at the moment there is a very large number of mandates, particularly if you look at global equities, across the LGPS, and quite frequent turnover of those mandates — and changing your manager is quite costly.”
The expectation, she said, is a smaller share of hiring opportunities for money managers, and, on top of that, less churn of managers because those allocations are likely to be in place for longer periods of time.
Jeff Houston, head of pensions in London at the Local Government Association, which has been facilitating meetings between government officials, local authority representatives and money managers and consultants, said that without knowing the final makeup of the pools, commenting on the effect on service providers is difficult.
“However it would not be a surprise if asset managers end up with a smaller number of direct clients,” he said.
Although funds are still waiting on the what, how, where and when of the government's pooling requirements, money managers are getting twitchy.
One money manager, who requested anonymity, said pooling is a risk for the money management business model, especially for what he termed the “low-hanging fruit” allocations such as passive equities.