UK public sector funds must justify any assets they hold outside of new pools once the vehicles are up and running, according to the government department overseeing the Local Government Pension Scheme (LGPS).
Teresa Clay, head of local government pensions at the UK’s Department for Communities and Local Government (DCLG), said individual schemes should look to move any assets – regardless of liquidity – into the pools “as soon as possible”.
LGPS funds must begin transitioning assets to the new pools from April next year. Eight pools have been formed but so far only two are accepting assets: the Local Pensions Partnership (LPP) and the London CIV.
Speaking at the annual Local Government Pension Investment Forum in London, Clay said all new investments made by LGPS funds should be made through an asset pool “unless there is a clear case that can be made” for investing through a different route.
“Exceptions must be minimal,” she added.
Clay acknowledged that long-term, illiquid assets should not (and in some cases could not) be sold, but urged LGPS funds to “bring them under management of the pool as soon as possible”.
She added that some schemes had highlighted legal issues with merging or transferring assets from some vehicles, such as life funds, into authorised contractual schemes – the fund structure used by the London CIV and being considered by other pools.
However, Clay emphasised that this was not a sufficient barrier to transferring the management of assets or funds to the pools.
Any assets not transferred to a pool “need to be kept under review and continually justified”, she said.
A number of individual LGPS funds have made investments into private equity projects or funds, or assets focused on their local communities.
For example, in February the £2bn (€2.2bn) Royal County of Berkshire Pension Fund bought a 20% stake in boutique manager Gresham House to help it establish a UK-focused investment fund.
The pension scheme has provisionally agreed to join LPP but has yet to invest significantly in any pooled funds launched by the partnership so far. In a draft version of Berkshire’s annual report for 2016-17, the fund said it would be “uneconomic” to pool asset classes such as the Gresham House investments due to transfer costs and “the inequality created by sharing future returns”.
Berkshire said it would consider future investment opportunities as they became available, focusing initially on liquid asset classes such as equities.