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IPE special report May 2018

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London council proposes collective vehicle as merger alternative

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  • London council proposes collective vehicle as merger alternative

UK – London local authority pension schemes could launch a collective investment vehicle (CIV) as a means of reducing investment costs and avoiding fund mergers, the £861m (€1bn) Wandsworth Borough Council Pension Fund has suggested.

Although the council previously spoke out against proposals to consolidate London's local government pension schemes (LGPS), its director of finance Chris Buss said in a report to Wandsworth's pension committee that maintaining the current individualised approach to tendering and investment was "not a viable alternative".

In a document presented during the committee's most recent meeting last month, he said Wandsworth should therefore take an active approach in promoting and establishing a London-wide CIV, with the vehicle tasked with appointing potential managers that each borough could select.

"The CIV would operate by maintaining a 'best of breed' selection of funds/managers for each asset class," the document said.

"These would be well defined, generally segregated mandates, with the CIV using its buying power to secure lower investment manager fees."

Buss said the CIV would also be responsible for all governance activities, perform due diligence on new managers and conduct quarterly meetings with all managers, reporting back to the individual borough's committees on progress.

The report stressed that the individual LGPS would not be forced to use any of the CIV's selected managers if it did not wish to do so.

"Boroughs would not be compelled to use any CIV manager, but clearly, best-in-breed managers at the lowest cost obtainable should make the selection of managers desirable," it said.

The report said its first aim should be investment in infrastructure, but that it could – in the long term – take on responsibilities outside of simple investment manager selection and daily oversight.

"In time, the CIV could also be used to provide any other officer-related investment duties that boroughs voluntarily wished to delegate – for instance, if key staff left a particular borough," the report said.

Bass suggested Wandsworth would be in an "ideal position" to act as host borough for the potential CIV, but warned that, even with the participation of other LGPS, the host could be left with start-up costs of up to £50,000 that it would be unable to recoup.

Discussions on reform to London's LGPS began in earnest well over a year ago after proposals for a London Pensions Mutual were drawn up by the London Pensions Fund Authority (LPFA).

The Department for Communities and Local Government has since announced that it will launch a consultation on inefficiencies within the LGPS sector, potentially paving the way for consolidation.

However, Wandsworth has been a staunch opponent of any plans to merge the London funds, with the chair of its pensions committee, councillor Maurice Heaster, arguing in March that a merger leaving the LPFA in charge of investment would have left Wandsworth £100m worse off since 2010.

"The merger plans that have now been put forward by LPFA would be disastrous," he said at the time.

"The creation of a single pension fund representing so many diverse town halls, with different economic and political priorities, would undoubtedly also lead to a more risk-averse approach to investments.

"The danger is that this would deliver lower returns, worse profits, higher employer contributions and inevitably higher levels of council tax."

The LPFA criticised Heaster's comments at the time, noting Wandsworth's three-year outperformance stemmed from its high exposure to equities – and argued that over both a five year and decade-long horizon, it would have outperformed the council.

However, other local authorities have sought to achieve savings through methods other than mergers, with Norfolk County Council recently acting as lead authority on a number of framework agreements for global custodian and actuarial services open to all LGPS.

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