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London, Lancashire schemes to create £10bn pooled investment fund

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The Lancashire Country Pension Fund and the London Pensions Fund Authority (LPFA) have announced a partnership to create a £10bn (€13bn) pooled investment fund as both schemes look for cost savings and improved governance.

It comes as the UK government looks to legislate changes to Local Government Pension Schemes (LGPS), aiming to create two collective investment vehicles for listed and alternative investments.

Both pension schemes currently employ in-house investment teams and have stated they wish to increase internal investment expertise.

The so-called asset and liability partnership will see the funds merge investment expertise and liability management and will eventually cover all areas, including administration.

Investments will be run by an external fund authorised by the Financial Conduct Authority (FCA) and owned jointly by the two funds.

The £4.9bn LPFA, created by the merger of several legacy pension arrangements stemming from the abolition of the Greater London Authority, now administers around 20,000 members.

The £5.3bn Lancashire Pension Fund provides pensions to 150,000 public sector workers in the North-West English county.

Susan Martin, chief executive at the LPFA, told IPE that, aside from pooling assets, the new fund would allow the growth of viable asset classes.

The partnership will also improve the funds’ governance and administration, she said.

“Liability management starts with having accurate data and ends with finding assets that match liabilities,” she said.

Martin added that the structure of the partnership and how it would work in practice were still being discussed with Lancashire, with no firm decisions on which personnel from which scheme would lead the investment fund or where it would be situated.

She also said both pension funds had to focus on setting up the partnership in the best interest of members and would not seek any additional pension fund contributors until fully operational.

The LPFA shaved nearly £400m from its deficit over the year to April on the back of investment returns and the revamping its fund structure.

Martin said this was evidence that the two pension funds could scale up and achieve better investment returns and internal cost savings by working together.

Councillor Jennifer Mein, leader of the Lancashire County Council, said the partnership would allow the fund to build on its “proactive approach” to asset and liability management.

“The government should be using the good practice of funds to drive up the performance of the Local Government Pension Scheme, rather than dumbing down to the average,” she said.

The government is expected to announce its decision on the future of the LGPS in early 2015.

Both pension funds responded to government consultation suggesting that mandating switches to passive investment was not the answer to reducing deficits in the LGPS, with more collaboration on governance and liability management mooted as a more appropriate solution.

Lancashire previously indicated that it would overhaul its asset allocation, earlier this year tendering for transition managers that could handle mandates worth as much as £5bn ahead of “significant” allocation changes.

Other London pension funds have also increased collaboration in recent months, announcing the launch of a collective investment vehicle, looking to reduce the cost of external asset management and allow greater exposure to illiquid assets.

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