Lothian Pension Fund may soon merge with a smaller scheme for transport workers, in plans being considered by the City of Edinburgh Council.
The council is responsible for the management of two local government pension schemes (LGPS) – the £4.4bn (€6bn) Lothian Pension Fund and the £386m Lothian Buses Pension Fund – but it has allowed both to remain standalone funds.
In a report prepared for the respective funds’ most recent pensions committee, the council’s acting director of resources Hugh Dunn said the buses fund was established as a sub-fund of the larger LGPS, with a clause within the regulation allowing for it to be “subsumed” into Lothian Pension Fund.
Dunn said the option of merging with the larger fund had been “highlighted and explored” as part of an ongoing review of the transport scheme’s investment strategy, which proposed that it gradually reduce its equity allocation in favour of bonds, while lengthening the exposure of its fixed income portfolio.
The strategy shift would also establish a distinct fixed income asset class, targeting an exposure of 22% by 2021, rather than the estimated 10% of fixed income assets held within alternatives, as at present.
The consideration to merge comes after Lothian Pension Fund successfully implemented a second, standalone investment strategy for certain employers sponsoring the fund.
The report said the unitisation strategy allowed for a 100% exposure to index-linked Gilts, while its current strategy would be employed for the remainder of the scheme’s employees.
It added that there was scope to increase the number of different strategies managed by Lothian.
“The unitisation functionality could help with implementation of the new investment strategy for the Lothian Buses Pension Fund, as it allows more flexible allocation of investments,” the report adds.
“It would also bring other efficiencies such as accounting, actuarial valuations and investment manager arrangements.”
Dunn’s report added that the merger should happen at the “most appropriate timing” but that further consultation with stakeholders – such as Lothian Buses – was needed before it progressed.
The changes would have no affect on a third pension fund managed by Edinburgh Council.
The local authority is also responsible for the management of the £155m Scottish Homes Pension Fund, sponsored by the devolved Scottish government.
English and Welsh local authority funds have been discussing mergers over the last few years as part of the UK government’s desire to increase scale in the LGPS sector, but the Scottish LGPS remains exempt.
The plans were eventually dropped in favour of the creation of asset pools, of which between seven and eight are now emerging following talks within the sector.