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LGPS should consider single infrastructure asset pool, report says

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Local authority funds in the UK should consider a single infrastructure asset pool, allowing schemes to better access the asset class, according to a report compiled by two dozen local authorities.

The report suggests the national platform could tailor to all of the schemes’ risk appetites by offering low, medium and high-risk infrastructure assets while reducing costs.

It includes input from dozens of the local government pension schemes (LGPS) in an effort to avoid 89 separate submissions to the Department for Communities and Local Government (DCLG) ahead of the 19 February deadline for proposals on the creation of asset pools.

Mark Wynn, who heads up the participating Cheshire Pension Fund, said the government’s aspiration for the LGPS to increase investment in infrastructure from its current £2bn (€2.6bn) would not be possible with the six asset pools proposed by the DCLG.

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“We felt that a national pool for those areas – and all the pools that feed into that – would give it sufficient mass when appropriate opportunities become available,” he said.

The London Pensions Fund Authority (LPFA) has already partnered with Greater Manchester Pension Fund to create a £500m infrastructure fund, which made its first investment late last year.

The LPFA’s chief executive, Susan Martin, has also called for the creation of an infrastructure clearing house, a recommendation mentioned in the report. 

Similarly, Wynn told IPE it would be good to avoid a situation where each of the asset pools invested in private equity (PE), instead opting for cooperation with a limited number of pools that could oversee the asset class on behalf of all authorities.

It report recommends that LGPS move away from funds-of-funds for PE, and that direct investment instead be employed by the pools acting on the system’s behalf.

A small number of asset pools for PE was preferred over a single fund, as was the case with infrastructure, as it would avoid capacity constraints, and, according to Hymans Robertson, the opportunities in small and medium-sized buyout funds were preferable to those offered to large vehicles.

The report also estimated that pooling active equity mandates alone could reduce management fees by around £64m over a 10-year period.

Overall, Project Pool estimated that less reliance on fund-of-fund structures and cutting management fees would cut costs by up to £183m over the next decade.

Despite the estimated savings from management costs, the report warns that initial costs stemming from the launch of the new management structures and transitioning assets to new managers will outweigh any savings.

“For some asset types,” the report says, referencing private equity, hedge funds and infrastructure, “it will be necessary to let existing investments run to their natural termination date to avoid the costs of early termination.

“This means the potential annual savings from pooling and new investment platforms will not be fully achieved until year 10 or later.”

Wynn also said the asset pools would need to decide how best to minimise the costs associated with transition management, arguing that one possible approach would be for a national procurement framework covering transition managers.

To date, eight potential asset pools have emerged from talks between 89 local authority funds, the largest – a £40bn pool – created through the co-operation of Greater Manchester with West Yorkshire Pension Fund and the Merseyside Pension Fund

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  • QN-2558

    Asset class: Private Equity.
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    Asset class: Multi Assets.
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    Closing date: 2019-08-30.

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