UK local government pension schemes (LGPS) launching asset pools should be “wary” of the risks associated with establishing in-house management capacity, as some have even questioned the need for internal teams.
Matthew Trebilcock, investment manager at the Cornwall Pension Fund, warned against the expectation that all of the emerging asset pools should have active management capacity on launch.
Speaking at the Pensions and Lifetime Savings Association’s local authority conference, he noted that the Brunel Pensions Partnership – the £23bn (€44.5bn) pool being launched by 10 LGPS, including Cornwall’s, largely based in the South West of England – only had passive management capacity in-house.
He took pains to emphasise government expectations that the creation of the pools should not see a decline in the performance of its constituent funds.
“Actually, doing that [maintaining performance] internally in terms of active management from day one from a pool that hasn’t had [active management] experience before will be very, very difficult and would be an inherent risk to that pool,” he said.
Other pools supported by funds with active management capability also saw risks associated with establishing in-house teams for the pools.
Fiona Miller, head of pensions at Cumbria County Council, said one of the challenges facing the £35bn Border to Coast Pensions Partnership (BCPP) – the pool backed by 13 LGPS, including Cumbria – was to ensure that none of the three funds transferring their internal investment teams to the pool suffered any detriment as a result of the process.
Miller said the three funds, including the South Yorkshire Pensions Authority, had “really strong long-term track records” managing assets in-house.
But the problem now facing the pool is bringing together the in-house teams into a single location, under the banner of BCPP.
“We’ve got to do that, and not to the detriment of the three funds [with internal management],” she said. “That is no mean feat – we’ll be moving a lot of staff, probably 30 staff, into a [Financial Conduct Authority]-regulated entity.
“The key priority for the first phase is to retain the performance for those three funds that have currently got internal management.”
Miller said the pool was unlikely to see a noticeable increase in internally managed assets in the short term, as the other funds would require a track record before being able to award new mandates to BCPP’s team.
But not all speakers believed the asset pools would be best served by building up in-house capacity.
The London CIV, supported by 33 of London’s LGPS, signalled that it was unlikely to build an in-house team in the near term, citing the immediate cost reductions it would achieve by negotiating with asset managers.
Julian Pendock, investment oversight director at the London pool, said it was “keeping an open mind” about in-house management, adding: “We just have to look very carefully against the start-up costs, fixed overheads and the running costs.”
He said that, in light of the “structural change” occurring within the asset management industry, the London CIV had to consider whether it could “credibly hire a team and suddenly compete with some of the best fund managers”.
The only other LGPS pool that has been launched, the Local Pensions Partnership – backed by the London Pensions Fund Authority and Lancashire Pension Fund – retained two offices for its already existing in-house management, based in London and Preston.