Welsh pension funds to merge passive equity holdings
The eight local government pension schemes (LGPS) in Wales are to procure a joint passive equity manager as collaboration among the public schemes takes hold.
The procurement, being organised by the Society of Welsh Treasurers (SWT) Pensions Sub Group, comes after discussion among the Welsh funds came to a halt with trepidation over central government policy.
Last week, the umbrella organisation for devolved government bodies, the Local Government Association, was told by the central government the 89 LGPS in England and Wales would have to pool assets to create efficiencies.
The move follows a string of collaborative efforts by LGPS in the Midlands to combine passive equity mandates, as well as efforts in London to create a collective investment vehicle (CIV).
Trustees at Welsh funds are set to approve plans this week to allow the procurement exercise to begin after guidance from the SWT, according to agenda documents for the £1.4bn (€1.9bn) Swansea Pension Scheme.
After approval, the eight pension funds, with more than £10bn in assets, hope to have a new manager in place by April 2016, with procurement starting by the end of November.
A briefing from the SWT said the eight schemes had £3bn in passive equity and bond holdings, run across three managers and 18 mandates – with a disparity of fees.
The schemes will appoint a third party to run the procurement exercise and split the cost of doing so accordingly.
Any provider would be appointed to accommodate geographical investment requirements of pension schemes – while each would retain autonomy and ownership of assets.
In May, the SWT received a report from Mercer on how the eight Welsh schemes could increase efficiency and cut investment management costs by collaborating.
The consultancy suggested joint procurements for passive investments and custody arrangements as an “easy win”.
It also recommended the creation of a regulated structure to allow the schemes to invest together in more complex asset classes.
The LGPS has come under increasing pressure from the central government over a fragmented system, where the 89 schemes, with more than £193bn in assets, use a variety of mandates and managers to invest in similar classes.
Others also have in-house capability.
However, in the summer, the government said LGPS funds need to collaborate or face stricter guidelines imposed by the Department for Communities and Local Government (DCLG).
The DCLG has since told the LGA all the £193bn would be pooled, with no funds being offered exemptions, regardless of in-house capability.
Further details are to be released in the autumn.