LPFA, Lancashire 'anticipate' GMPF tie-up amid pooling shortfall
The Lancashire County Pension Fund (LCPF) and the London Pensions Fund Authority (LPFA) are in talks to partner or work with the Greater Manchester Pension Fund, among other UK local government pension schemes (LGPS), having acknowledged that their partnership had failed to meet the government’s target size for LGPS pooling arrangements.
The LCPF and LPFA were the first schemes to announce a partnership, doing so even before the UK government launched a consultation on reforms of the LGPS, which called on the schemes to pool investment assets.
English and Welsh LGPS have until today, 19 February, to report to the Department for Communities and Local Government (DCLG) on their commitment to pooling and the steps they have taken in this direction.
There are currently eight asset pools emerging from talks among the LGPS, including the partnership between the LPFA and LCPF.
It is one of the most advanced of the partnerships, having last year named Michael O’Higgins as its chairman, but, with combined assets of approximately £11bn (€14bn), it is unclear whether it will gain the DCLG’s approval, as it does not yet meet the £25bn asset target set by the government.
The LPFA acknowledges this shortfall in its response to the DCLG:
“We welcome the government’s ambition to achieve pooling within the sector but recognise the ALM Partnership will be required to expand its pool to achieve [its] target criteria,” it said.
It confirms the partnership’s “commitment to wider pooling” and sets out the discussions it has had with LPGS “groupings and individual funds” to date and the outlook in this regard.
It has exchanged letters of intent and is in discussions “around how to best work together” with the Greater Manchester Pension Fund (GMPF), the Merseyside Pension Fund (MPF) and the West Yorkshire Pension Fund (WYPF).
The funds have total assets of around £35bn.
The GMPF is the largest local authority fund in the UK (£17.6bn), with substantial in-house management.
The LPFA refers to the “very significant in-house expertise” of all three of the northern funds in its consultation submission.
“Given the timescale, discussions are at an early stage,” it said. “But the next steps between now and July are for all participants to develop a proposal around how the pooling arrangement will work and meet the government’s criteria.
“All parties anticipate the discussions reaching a successful conclusion.”
The LPFA already works with the GMPF on infrastructure, having in January last year launched a £500m investment vehicle for infrastructure and alternative assets – the joint venture announced its first investment in October.
As concerns the new pooling arrangements called for by the government, the LPFA and its Lancashire partner have also had talks with the Royal County of Berkshire Pension Fund.
The LPFA noted that Berkshire “has indicated in a paper to their Pension Fund Committee that the ALM Partnership pool will be their preferred route for pooling purposes”.
The LPFA and LCPF “hope to include Berkshire in the wider pooling discussions”, they said.
For its part, the Berkshire Pension Fund in its draft response to the government noted that it agreed that “Officers should continue discussions with the London Pensions Fund Authority and Lancashire County Council and other nascent pools”.
Further cost savings
The LPFA and Lancashire County Council are aiming to start pooling all assets from April, with the expectation that the Financial Conduct Authority (FCA) will approve the operating vehicle of the organisation, an Authorised Contractual Scheme (ACS), by the end of next month.
The two funds have jointly invested around £1.5m in start-up costs to provide the foundations for a pool.
“The scale of commitment required to get this type of arrangement off the ground is not to be underestimated,” they said, “and we have been happy to share our learning with colleagues from other funds, even when they are seeking to create alternative pools.”
They estimated saving some £30m over the next five years on investment management fees, a conservative estimate based on “the experience of just our two funds collaborating thus far”.
Investment outcomes, meanwhile, could be enhanced by around £20-£30m by the funds’ increased scale, also on a conservative basis, according to their report.
“Given our commitment to wider pooling, we fully anticipate further cost savings to emerge from the detailed analysis that will take place between now and July,” it said.
The submission to the government also makes a case for the ALM Partnership’s infrastructure investment capability – noting, for example, that participation in overseas transactions had allowed the team within the partnership “to develop relationships with significant overseas pension funds that potentially will allow the ALM Partnership (and any wider pool that is created) to participate in some larger deals as co-investors”.