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UK public pension funds establish private equity vehicle

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The members of the UK’s largest public sector pension asset pool have established a collective private equity investment vehicle, according to one of the funds.

The Northern Private Equity Pool (NPEP) will make commitments of around £720m (€805m) in 2018 and 2019, according to the £8.6bn Merseyside Pension Fund.

Merseyside, Greater Manchester Pension Fund and West Yorkshire Pension Fund have formed the Northern Pool in line with the UK government’s policy for the Local Government Pension Scheme (LGPS).

NPEP, a limited partnership, was incorporated on 22 May. Merseyside said it would probably contribute around £160m to the private equity fund.

The three funds already have a collective vehicle for infrastructure investments, known as GLIL.

Writing in Merseyside’s 2017-18 annual report, chair of the pensions committee Paul Doughty said the administering authorities of the three pension funds in the Northern Pool were “close to formalising governance arrangements”.

The joint committee providing oversight of the pool had been operating in shadow form.

Separately, Merseyside hinted that it was considering implementing a downside protection strategy following improvements in its funding level.

Doughty said valuations indicated funding levels of around 100% and that “ways to ‘lock in’ some of the gains achieved are being assessed”.

Several UK public pension funds have recently adopted equity protection strategies to secure gains made in the public equity markets while limiting their exposure to any downturn, without having to change allocations to the asset class.

Merseyside said alternatives, driven by strong performance in private equity and infrastructure assets, contributed significantly to its investments outperforming the fund’s benchmark in the financial year to the end of March.

The LGPS fund’s investments gained 3.7% in 2017-18, compared to 2.7% for its benchmark.

Merseyside steps up carbon reduction work

Meanwhile, the pension fund also said it was reviewing its investment beliefs and strategic framework, including its asset allocation policy, to ensure these “appropriately” integrate climate risk considerations.

Merseyside’s pension committee had mandated that the fund’s investment strategy be brought into line with the goals of the 2015 Paris Agreement.

It said its current focus on climate risk management had been on the mitigation of transition risk – the risk of carbon-based assets losing value as a result of regulatory or other action to curb global warming.

Merseyside said a carbon footprint analysis of the fund’s listed equities showed it had significant concentrations of climate risk within the UK and North American segments of its equity portfolio.

The pension fund had set itself the target of switching one-third of its passive equities into a low-carbon index-tracking strategy. The goals would be to mitigate transition risk in UK and North American passive equities by reducing emissions intensity by around one-third, and reducing exposure to fossil fuel reserves by around half.

The pension fund would also seek to introduce a tilt towards companies benefitting from “the burgeoning low-carbon economy”.

It would continue to invest in the low-carbon economy through the unlisted, illiquid segment of its strategic benchmark, mainly via its 7% allocation to infrastructure.

The pension fund expected to have more than £250m invested in renewable energy by 2020.

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