The hard work of building the UK super funds

iStockphoto / FN montage

The new larger funds will be running some of the biggest savings pools in Europe and can thus drive a harder bargain with fund managers – and will be increasingly bringing investment in-house. They will also have the size to run more diverse investment strategies, with the know-how to invest directly in private equity, infrastructure, and other alternatives.

What is surprising is that it’s happening at all. Central government, worried about needing to bail out underfunded schemes, has long wanted to bring order to the world of local government pensions, which range from the mighty £17.6 billion Greater Manchester Pension Fund with 340,000 members to a scheme for transport staff in South Yorkshire with just £212 million. With so many practical obstacles, it is no surprise that previous campaigns have fizzled out.

George Osborne’s announcement at the 2015 Conservative Party Conference in October, however, catalysed the change. The former Chancellor wanted to get the schemes to invest in infrastructure to “get Britain building” – hence the British wealth fund moniker – but he also wanted to cut costs.

Fast-forward to today and eight groupings are under construction, ranging from about £13 billion to £36 billion in size – no mean feat. Despite the loss of the chief architect, the government expects these groupings to be running assets by April 2018.

John Finch, oversight board chair of the £23.2 billion Brunel Pension Partnership, which is to pool the assets of 10 funds, said: “The Treasury has been surprised how quickly and easily the authorities have chosen to work together. The challenge is maintaining that momentum.” The UK’s decision to leave the European Union and the ensuing political instability has not been an easy backdrop for such a task.

“We have to push ahead come what may,” said Colin Pratt, investment manager at Leicestershire County Council, who also sits on the programme group overseeing the creation of the £35 billion Central asset pool. “The process can’t stop now.”

Groundwork

Phil Triggs, strategic finance manager in pension fund and treasury at Surrey County Council, said the momentum behind the pooling was unlikely to be halted, despite Osborne losing his position.

Triggs, whose fund joined the £36 billion Border to Coast group, said: “We are setting up work streams without racking up too much expense ahead of an official government go-ahead. We will need a joint committee to work towards our goals and each local authority will need to approve an amendment to its own constitution to create that joint committee.”

The approach taken by Border to Coast, in which it will launch its own collective investment vehicle, involves creating an operator to oversee all the front, middle and back-office tasks usually undertaken by a third party fund manager. Triggs said: “Just looking at the IT, compliance, taxation, asset transition, creating a depository, etc. is a lot of work. We will need help researching, specifying, selecting and contracting with future partners.”

None of the local authorities has been given more money or staff to cover this significant amount of extra work. Many of the funds are also undergoing actuarial valuations, a triennial calculation for all the 89 schemes that measures their assets and liabilities, which is adding to the workload.

Furthermore, due to their “under construction” status, working structures are not as streamlined as they could be. Triggs said: “The member steering group has no legal status, so all decisions still need to be approved by each separate fund. Over the next few months, each fund will have to get its constitution amended to set up the joint committee and allow these important decisions to be made more efficiently.”

However, third-party companies, such as investment managers and custodians, have been helpful, pooling partners told Financial News. The Financial Conduct Authority – criticised by some in the sector – also drew praise for taking on additional staff to assist with the creation of the investment company structures that will manage the assets. The FCA will have the crucial task of approving the submissions sent by the pools for these fund management vehicles. Bearing in mind the size of these pools and the fact they will be managing the pensions of public sector workers, any failures could be disastrous.

Regulation bottleneck?

The real test of the FCA’s mettle will be whether it can deal with an influx of submissions from pools seeking approval for their regulated company structures ahead of the April 2018 deadline. It has already approved proposals from the London CIV and the Local Pensions Partnership, which are up and running, but has not had to deal with several funds simultaneously trying to meet the deadline.

Pratt at Leicestershire said: “We have concerns [about whether] the FCA will be able to simultaneously approve four or five pools.”

The FCA did not respond to a request for comment.

For Triggs, the most important move for the Border to Coast pool will be the appointment of a project manager. “This is an enormous project,” he said. “So we need a qualified project manager – not necessarily one who knows about the investment process, but someone who can manage deadlines and inspire the team to keep to those deadlines.”

The Central pool has hired its own specialist and legal advisers to help with the process, while the Brunel pool has appointed project management specialists.

Some, however, are already ahead of the game. The LPP, formed by the Lancashire Pension Fund and the London Pensions Fund Authority, is on the way to start pooling proper. Michael O’Higgins, chair of the LPP and former chair of the Pensions Regulator, said: “There is a difference in the pooling of funds and pooling the management of funds. We have not pooled assets yet, we are just making sense of the different asset classes.”

The LPP, which expects to bring Berkshire’s pension fund on board after trustee approval has “a giant spreadsheet” that helps it look at which investment managers it is using, which it wants to change and how it wants to change the overall portfolio.

O’Higgins said: “Our FCA status means we will soon be able to merge the fairly liquid assets, like equities, then move in the next 12 to 18 months to merge any others.

Some assets, however, may never merge.

This aspect of deciding what, which, how and who is part of a bigger issue the pools must address: governance.

The local authority pension funds only had a short time to decide which pool to join and, like any hastily arranged marriage, some funds may eventually regret their decision and look for a divorce. William Bourne, an independent investment and governance adviser to town hall schemes such as East Sussex and Nottinghamshire, recommends that funds should, in effect, sign a pre-nuptial agreement. These contracts would set out what would happen in exceptional circumstances if, for instance, a fund wanted to leave its pool and to what extent funds can be held individually responsible for the overall costs of the pools.

Bourne said the agreements should also set out the roles and duties of the various parties within the pools, such as administering authorities, shire councils, pension committees and pension officers.

All in all, it is a huge amount for the pools to consider, act on and implement – all before April 2018. Teaming up for the pools was one box ticked. There are plenty more to address.

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