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IPE special report May 2018

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Welsh LGPS tender £2.6bn worth of passive mandates

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The eight local government pension schemes (LGPS) in Wales are looking for a joint manager of their passive equity and bond holdings, a mandate initially expected to be for some £2.6bn (€3.4bn).

As previously reported, the decision to procure a joint manager was taken by the Welsh LGPS last year in the context of long-standing discussions about collaborating to cut costs and increase efficiency.

The central government then intervened with the instruction for the 89 LGPS in England and Wales to pool assets, with eight asset pools having emerged so far ahead of a 19 February deadline for submission of consultation responses to the Department of Communities and Local Government (DCLG).

The eight* Welsh schemes have more than £11bn (€14.4bn) in combined assets.

Around the time of the decision to procure a joint manager, their passive equity and bond holdings were said to amount to approximately £3bn and were run by three managers across 18 mandates.

The three managers are BlackRock, Legal & General Investment Management (LGIM) and State Street Global Advisors (SSGA). 

Welsh LGPS passive mandates breakdown. Source: Invitation to Tender
MandateBenchmark£m
   
UK EquityFTSE All Share1,224.50
   
Global EquityGlobal Equity438
 FTSE All World90.8
   
US EquityFTSE North America163
 FTSE All World Canada8.8
 FTSE All World USA258.3
   
European EquityFTSE All World Dev Europe ex UK69.2
   
Asia Pacific EquityFTSE All World Dev Asia Pac ex Jap53.2
 FTSE All World Dev Asia Pac Jap24
   
Japanese EquityFTSE All World Japan28
 FTSE All World Dev Japan ex UK 95% GBP  Hedged11.3
   
Emerging Market EquityMSCI Emg Mkts75.7
 IFC Investible Comp ex Malaysia44.8
 MSCI Global Emg Mkts32.1
 IFC Investible Comp ex Malaysia8.8
   
Alternative EquityFTSE RAFI Developed 1000 QSR TR93.5
   
GiltsFTSE All Stocks IL Gilts61
 FTSE All Stocks UK Gilts4.5
 FTSE All Stocks UK Gilts3.1
 Iboxx Sterling Non Gilts All Maturities8.3

The collaborating Welsh funds are now seeking to appoint a single manager jointly.

Aon Hewitt is running the procurement exercise.

The joint management of the funds’ aggregated passive investments is expected to be cheaper than if each fund separately ran its holdings.

According to tender documents, the new provider would ideally be able to provide funds that meet each of the existing passive benchmarks, of which there are 21 (see table).

The largest holdings to be managed are in UK equity, amounting to £1.2bn, with the FTSE All Share the benchmark. 

The next largest existing mandate is for global equity, for £528.8m, followed by North American equities.

The Welsh funds also have investments in European, Asia Pacific, Japanese and emerging market equities plus “alternative equity”.

Some £77m is in Gilts.

The deadline for tender submissions is 4 March.

The outcome of the procurement process is currently scheduled to be communicated the week of 28 March.

The most “economically advantageous” tender will win the mandate, according to an EU tender document.

In England, a consortium of seven local authority funds recently awarded LGIM £6.5bn worth of passive mandates, reducing management fees by more than 50%. 

*The eight schemes (and their administering authorities) are: Cardiff and Vale of Glamorgan Pension Fund (Cardiff), City and County of Swansea Pension Fund, Clwyd Pension Fund (Flintshire), Dyfed Pension Fund (Carmarthenshire), Greater Gwent Pension Fund (Torfaen), Gwynedd Pension Fund, Powys Pension Fund and Rhondda Cynon Taf Pension Fund.

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