The pooling of UK local government pension schemes is likely to lead to fewer, but larger mandates, for external fund managers.
Rules for the Local Government Pension Scheme (LGPS) in England and Wales are set at national level but it is made up of 89 different funds, administered at local level by individual pension fund authorities. The scheme is one of the largest defined benefit schemes in the world and the UK government has been looking at changes in order to cut costs and make it easier for local authorities to invest in alternative asset classes such as infrastructure and real estate.
Last year the LGPS consisted of 81 funds in England and 8 in Wales with a combined total of more than five million members and £214bn ($260bn) in assets according to a briefing note for the House of Commons in April 2016. The briefing note said: “These pools will deliver annual savings of at least £200m to £300m, and we will work with administering authorities to establish a new Local Government Pension Scheme infrastructure investment platform, in line with their proposals, to boost infrastructure investment.”
The UK Government launched a consultation process in 2014 on proposals to allow investment in common investment vehicles. In July this year the government received detailed proposals for eight investment pools, six of which could have more than £25bn in combined assets from their local authorities.
Andy Todd, head of UK pensions and banks, Asset Owners Solutions at State Street, said in a media briefing today that local authorities can still set their own asset allocations and can then choose whether to invest in a pool or continue to hire their own asset managers themselves.
“Pools will need to develop capabilities to attract assets from the local authorities,” added Todd. “This will lead to a consolidation of external mandates, although individual mandates will become larger.”
Councillor Kieran Quinn, chair of the Greater Manchester Pension Fund and Local Authority Pension Fund Forum, said in the publication Public Sector Executive that there may be drastic implications for asset managers as pooling will overall reduce fees and income.
“More internal asset management going forward will create stiff competition when tendering mandates,” Quinn said. “Fee reductions for plain vanilla indexing may reduce fees to virtually zero via joint procurement.”
However Quinn added that the pools will become large enough to make more esoteric investment strategies that may increase fees in the long run.
Nick Wright, head of UK, Middle East, Africa, Netherlands and Nordics at State Street said at the briefing that the pension pools will have to set up as regulated asset management company by April 2018.
“The data used by pools will be critical,” said Wright. “They will need to be able to report back to local authorities and have risk and performance analytics.”
Separately, a State Street survey of 400 global pension professionals also found that 61% are looking to insource more risk management tasks and 53% intend to carry out more investment related functions in-house.
Longitude Research, a global research firm, conducted the survey of institutional asset owners for State Street in October and November last year. The survey had responses from pension fund professionals, spanning both defined contribution and defined benefit assets across 20 countries.
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