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IPE special report May 2018

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Basel III, Solvency II could provide 'investment options' to pension funds

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  • Basel III, Solvency II could provide 'investment options' to pension funds

UK - Incoming supranational regulation such as Basel III and Solvency II could open up investment areas pension funds were previously "crowded out" of by insurance companies and banks, according to the head of Lancashire County Council's pension fund.

Speaking at the Local Government Pension Investment Forum, the £4bn (€4.5bn) scheme's chief investment officer Mike Jensen said the incoming regulations would make certain assets, including Private Finance Initiatives (PFIs) - a UK approach to Public Private Partnerships (PPP) - more readily available.

"The issues to come out of Basel III for banks, the issues to come out of Solvency II for insurance companies, is where they might have to offload products," Jensen said, explaining that this would open up areas including PFIs, as well as infrastructure debt and equity.

Real estate industry heavyweights recently told the Expo Real conference in Munich that property was "not really profitable" for insurance companies and that they would therefore be forced to reduce their exposure to the asset class.

Jensen further highlighted that social housing and mortgages were being considered as investment opportunities by the local authority fund.

Asked about funding for small and medium-sized enterprises (SMEs) at a time of slow economic growth, he acknowledged that investment in local companies was an area Lancashire hoped to expand into in future, but the task of due diligence on each individual investment was currently holding it back.

Jacqueline Gillies, Jensen's counterpart at the £11.3bn Strathclyde local authority scheme, said that it did, at present, allocate a "relatively small" amount to SMEs and cited the Scottish Loan Fund, as well as its private equity programme, as a way for companies in the region to access its capital.

However, she conceded that a large number of SMEs chosen were in the technology area, as these could then be sold on to larger companies within the sector.

Gillies said private equity did come with its own set of problems, however, recalling the market turbulence at the beginning of the banking crisis.

"In 2008, we were still being asked by our private equity managers to invest at the same time as distributions were drying up," she said.

"Although we are a cash-flow positive fund, we were in a situation where it would not have been [in that situation] much longer, and we would have been drawing down on our investment income."

Jensen, meanwhile, suggested it was time for all local government pension funds (LGPS) to follow Australia and Canada's larger pension schemes into direct investments, although Geoff Reader, head of the Bedford scheme, admitted that coordinating nearly 100 funds to "move in the same direction and the same way" was not going to be a "straightforward" option.

But Peter Wallach, head of pensions at the £5.1bn Merseyside Pension Fund saw further cooperation between schemes as the future.

"Certainly, we are in a lower-return environment where we have to have an increasing focus on the increasing costs of some of the alternatives we have been hoping to move into," he said.

"As a group of local authority funds, perhaps there are things we can do collectively to use our combined power to reduce costs."

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