The Northern Pool asset partnership between three U.K. local authority pension funds has published its plans to pool £35.4 billion ($45.8 billion) of assets as part of the government’s aim to save costs and improve performance by consolidation.
Proposals on how pension funds will work together were submitted to the government July 15. The government wants to reduce costs, improve performance and increase investment in U.K. infrastructure under pooling plans revealed in the 2015 budget.
The Northern Pool, made up of the West Yorkshire Pension Fund, Bradford; the Greater Manchester Pension Fund; and the Merseyside Pension Fund, Liverpool; intends for all non-listed assets to be managed under the pool structure starting April 1, 2018.
An investment management agency, which will seek authorization from the Financial Conduct Authority to operate as an alternative investment fund manager so it can operate collective investment vehicles in alternative asset classes, will be equally owned by the three participating administering authorities.
Once the pool is in place, new investments in non-listed assets will be made on a shared ownership basis via collective investment vehicles or limited partnerships. For the immediate future after the inception of the pool, listed assets will continue to be held in segregated allocations, owned directly by the participating authorities, but managed by the agency.
The agency will establish an oversight company committee, consisting of three representatives from each participating authority, to provide oversight of the investment management agency and its directors and to act as a forum for the authorities to express their pension committees’ views.
Money managers will be selected by the investment management agency and investment committees. The pension funds manage a total £10 billion of assets internally, and it is expected “that the proportion of listed assets which are internally managed by the pool will increase over time.” According to the proposal, two funds use external money managers for listed assets and the submission said that following its inception, the pool “will continually review whether internal or external management is most appropriate for each investment mandate. It is likely that direct property investments will continue to be managed externally on an advisory basis.”
For private equity, infrastructure and real estate funds, the submission said all three pension funds “currently internally select a substantial proportion of their new fund commitments in these asset classes. The expectation is that following the inception of the pool, a greater proportion of the investment in these asset classes will be internally selected (including co-investment) rather than invested via a fund-of-funds approach.”
The West Yorkshire and Merseyside pension funds in the fall will join Greater Manchester’s existing direct U.K. infrastructure investment, GMPF & LPFA Infrastructure LLP, which is a joint venture between GMPF and the £4.6 billion London Pensions Fund Authority formed in April 2015 and seeded with £500 million of commitments to increase exposure to infrastructure.
Each fund’s pension committee will retain responsibility for meeting fund liabilities and setting asset allocation.
Savings are expected to reach £5.1 million per year by 2021, and £28.3 million by 2033. This will be realized predominantly from increased resources that allow the pool to access some alternative asset classes in a more cost effective way. It is assumed that the pool will also move from hedge fund of funds to direct investments and will reduce the proportion of indirect real estate and infrastructure relative to direct.
Separately, the Brunel Pension Partnership said in a newsletter it will establish an FCA-regulated company — the Brunel Co. — to manage an asset pool that will be jointly owned by 10 local government pension funds with £23 billion in total assets. Each fund will retain asset allocation decisions, but the Brunel Co. will choose underlying money managers and the structure of portfolios. Net savings will reach £13 million per year by 2021, potentially rising to £70 million per year longer term.