UK's Northern pool to go direct in alternatives, targets 25% cost reduction
The UK’s largest local authority pension pool predicts its collaboration will see costs fall by 25%, as the three pension funds abandon fund-of-fund structures in favour of co-investments.
The £35bn (€41.9bn) Northern pool – previously known as the Northern Powerhouse pool and backed by the Greater Manchester Pension Fund (GMPF), West Yorkshire Pension Fund and Merseyside Pension Fund – also said it planned a longer-term allocation of 15% to infrastructure, increasing by 10 percentage points the combined funds’ allocation to the asset class.
The pledge was contained within the collaboration’s final consultation to the Department for Communities and Local Government, to which local government pension schemes (LGPS) had to outline their pooling proposals by 15 July.
“With such a large investment pool composed of partners from across the North, the fund will deliver both the commercial returns required and social value to the regions that each of the funds represent,” a letter attached to the funds’ consultation response said.
The letter, signed by the funds’ respective chairs, also said it hoped to increase its current 4.5% allocation to infrastructure – equivalent to £1.6bn – to its 10% target within 3-5 years.
The letter continued that the funds were targeting a 25% reduction in costs, a “significantly ambitious” target that could partially be achieved by moving externally managed equity and bond portfolios in-house in the coming years.
“The savings arise predominantly from the increased resource of the pool enabling many alternative asset classes to be accessed in a more cost-effective way,” the letter added.
It said that, rather than the three schemes being reliant on funds-of-funds within the private equity and hedge fund space, it would instead opt for co-investments and single strategy funds.
The pool’s submission to government added that it would also place greater emphasis on direct real estate and infrastructure investment, although in the case of the direct property mandates, the pool expected them to still be managed externally on an advisory basis.
The pool also continued its push for the GMPF’s joint venture with the London Pensions Fund Authority, a £500m infrastructure fund, to become a national vehicle for LGPS investment in the asset class.
The venture already enjoys the backing of West Yorkshire and Merseyside, with the two funds expected to each contribute £250m in capital towards by the autumn of 2016.
The Northern pool is the largest of eight pools to emerge following attempts by DCLG to increase scale across the LGPS.
The collaborations largely aim to pool assets by April 2018, although the London CIV and Local Pensions Partnership are already operational.