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Plan to pool London pension assets must overcome 'significant challenges'

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UK - Proposals to pool the assets of all local government pension schemes in London to create a £30bn (€36bn) vehicle would need to safeguard the independence of existing funds, Hymans Robertson has warned.

Speaking to IPE, Barry McKay, partner at the consultancy, also said that the legal implications of the new arrangement - proposed by London Pensions Fund Authority chief executive Mike Taylor and the chair of the Local Government Association - would need to be carefully considered.

In addition to the creation of a London Pensions Mutual, councils were also asked to consider the launch of a £2.5bn London Infrastructure Investment Vehicle targeting infrastructure investments in the region - a suggestion warmly welcomed by the UK's business lobby group CBI.

Katja Hall, the group's chief policy director, said infrastructure in the country's capital was "crying out for capital".

"Pension funds are natural investors in infrastructure and will want to invest in projects that are designed to give returns, so we now need to see other public sector funds coming forward in this way," she said.

McKay was more cautious about the proposals, saying a number of hurdles had to be overcome before any pooling could take place.

"It would need to be quite carefully set up," he said, noting that it should not be "forced" on funds.

"You'd effectively have to set up a multi-employer scheme, but each employer would be in a sub-fund, and you would have to track the assets and liabilities for each of the merged funds."

He added that all the legal implications would have to be considered carefully, with the possibility of pooling therefore potentially easier than full scheme mergers.

These concerns are evident in minutes from the meeting by London Councils - where the plans to pool LPFA and London council funds and the pension assets held by the Corporation of London and Transport for London were initially discussed.

The minutes read: "Should the amalgamation of pension funds be considered, it would have to be carefully balanced against the need for London boroughs to maintain direct control over management of assets, liabilities and, crucially, outcomes to actuarial valuations.

"A model can be created that achieves such an outcome, but this will only work if the nature of the relationship between the local fund and the amalgamated funds are clearly governed and work on behalf of all of London and its funds."

The Local Government Association, meanwhile, appeared to distance itself from chair Sir Merrick Cockell's backing of the undertaking, with a spokesman saying there were "significant challenges" associated with the proposals.

"Reconciling variations in the proportion of funded liabilities between the different schemes and ensuring residents are not left exposed to higher pension costs are the biggest," he noted.

The spokesman added that they could be overcome and that councils were "keen" to reduce overall administrative costs.

"It is a delicate process that can only be concluded if the trustees are satisfied the move corresponds with their fiduciary duty to scheme members," he said. "Ultimately, it comes down to local priorities."

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