Cumbria County Council’s Fiona Miller is at the heart of efforts to build the Border to Coast pension pool as well as a project to create a cross-pool group to invest in infrastructure. Room151 caught up with her to talk progress so far.
Room151: So how is pooling going? Are you on course, broadly speaking?
Fiona Miller: We (Border to Coast, or BCPP) were the only pool in the spring update to government that said we will be ready by June, not April 2018. We said right from the beginning that if we didn’t get approval from the minister in September 2016 then, because of local elections, it would be very difficult for us to recruit people by the April deadline, which has proved the case.
We had elections in seven out of the twelve Border to Coast councils and have seem some churn in others; not necessarily at the pension fund chair level, but it has meant that we’ve had to get people back in place before we can run the recruitment process for the pool.
The interview for the chairman was last week and then everything sort of tiers down from that.
Room151: How have things changed in respect of how the twelve funds make investment decisions?
FM: They haven’t.
Room151: So you get to June 2018 and the light goes on and everything changes?
Fiona Miller: No, that’s not how it works at all. I mean basically now we are doing a lot of collaborative work. If anybody’s looking at anything, or they’ve done due diligence on some things, then we’re not advising each other but we are sharing anything we’re looking at.
So, there’s a greater degree of awareness and collaboration across the partner funds. We’ve already secured savings on the passive management. The majority of us had the same passive manager, so that’s in the bag and done.
There is only so much capacity both internally and in the market to bring on regulated sub-funds which means this huge transition process is planned over a period of time. The plan is for a three-to-five year transition period. In the meantime, until the pool has a sub-fund up and running that meets the requirements of each of the partner funds to put one of their allocations into, then the funds just continue as normal. None of us can afford to be out of the market for a prolonged period of time.
This idea that seems to be held that June 2018 is a big bang moment when we move £43bn—which is what we have as of March 31, 2017—is just not how this is going to work.
An additional issue for BCPP, and key to understanding how the transition process will work, is that we’ve also got to manage how we move the three internal teams. We’ve got a huge book of internal management—about a third of the pool by assets under management (AUM)—when we move those staff, so we’ve got to be able to trade effectively for those funds. The regulatory permissions being sought require that there will be an initial focus on getting those internal teams up and running.
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Room151: Is there a plan in terms of how that percentage of internally managed money might change after 2018 or during the three to five-year period?
FM: We see internal management very much as a philosophical decision for each fund. There is absolutely no compulsion for any externally managed fund to go internal. For those of us that think [internal management] is a good idea and may consider taking advantage of it, we will want to see a track record first.
It’s up to each fund to decide whether it wants internal or external management. Wherever there’s an internal offering, there will be an external offering and it will be for each fund to make a decision on a sub-fund by sub-fund basis.
Several of the funds, and I can speak for Cumbria here, think there is tremendous value in some of the internal offering and we will be looking just to get a feel for that internal performance.
But once the pool is up and running and the teams are in place, we will seriously be looking at moving some of our assets to internal management. But the proposal as submitted to DCLG does not assume any savings on the back of doing that.
Room151: Arguably, there are some less problematic pools than others. Where do you put Border to Coast in that scheme of things?
FM: This is horrendously difficult for anybody and we’ve all got different problems. I mean, London corralling 33 councils has its own set of problems; us managing internal and external money and having to TUPE staff brings its own problems; Northern having only three partners of very different sizes has its own problems; Brunel— obviously they’re leading the way with a different structure and that will have its own problems.
I see each pool doing something slightly different with a different set of problems and we’re all working unbelievably hard to make this happen. I’ve said all along there is no single model that fits all pools, each pool must be structured to meet the needs and capabilities of the underlying funds.
Room151: Are they the problems you thought you’d see when you set out on the journey?
FM: It’s a project, and it’s a project that’s off the scale in both size and complexity. Nobody has done this at the scale and speed we’re looking to do it. It doesn’t matter who you talk to: the regulators haven’t seen movement of this scale and speed before; the custodians can’t imagine moving this much money into some many newly created sub-funds.
The biggest issue is people understanding that local government legislation and Financial Conduct Authority legislation do not necessarily make good bed fellows. So, yes, but as with any large project we have a detailed project plan, have employed a lot of professional support and then just tackle each unexpected issue as it comes up and tick them off the list.
There’s no solution out there that you can just go and lift off the shelf. … The fact that we’ve got as far as we have, as fast as we have, I think speaks volumes about the the dedication of the implementation officers and the support received from the councillors and statutory officers to help the fund officers make this work..
Room151: Can you give us an example of how the different legislation is problematic?
FM: It’s things like ensuring you’re Teckal compliant, which is the local government legislation. So that we can actually give this pool our money, we have to be able to demonstrate significant control of the company. But the FCA legislation is all about independence; independence of decision making and no external influence in investments. That’s been a very fine line, writing all the legal documents to make sure that we are Teckal compliant but we are a standalone company in so far as investment management is concerned.
Room151: You’re also responsible for a huge infrastructure project. Can you give us an update on that?
FM: We’ve set up the officers’ cross-pool group and that is there for us to share experience, and gain efficiencies if possible through doing things not just within the pools but across pools.
For example, if you’re seeking a legal opinion, two or three pools can get together to save on costs. We also wanted to ensure a consistent messaging to and from government, so both cabinet office, DCLG and LGA representatives attend each meeting.
It’s been a very, very successful officer group. It doesn’t make any decisions as such, it is purely about collaboration at the level above your individual pool. In addition, there’s now three work streams from the main group: infrastructure, responsible investing and, now, a tax workstream.
On infrastructure, which is the group I chair, we’ve had a lot of meetings with chief investment officers of the big Canadian, Dutch and Australian pension funds to discuss how they invest and what works well and how they would do it if they were starting afresh. There’s no point looking at something that was set up to answer a question 20 years ago and assume that the market is the same now.
The one thing that is clear from everybody we’ve spoken to is this isn’t just about capital. This is about the governance structure you put in [place] to make this work.
There’s a lot of money chasing infrastructure, especially in the UK at the moment. Projects have their pick of who they want to actually take the money from, and a lot of it is about the governance structure and whether you are a reliable partner? Can you commit the money? Can you make the deal work? Have you got the resource to do the due diligence? All the things that are just impossible to marshal as 89 funds.
So, any infrastructure platform, or whatever it is we end up building, has to follow after the pools.
It’s only when you’ve got the staff and the delegations to the pools that you can operate a reasonable governance structure.
At the moment we’re just constructing a template to go out to all the funds to ask what they want to buy from any collaborative platform. It is such a huge asset class and we’ve had a lot of conversations with governments because they have one definition of what infrastructure is and the industry and ourselves tend to operate to a different definition.
Room151: How does that differ?
FM: Things like social housing we would tend to put in a property allocation. They would call it infrastructure.
There’s just been a lot of educational discussions going back and forth about who means what when we’re discussing infrastructure so we can get to a point where at least we have a common language.
Room151: Now that there’s GLIL and the Pensions Infrastructure Platform (PIP) and your own project; is it fair to say that this idea of national infrastructure platform won’t happen?
FM: No I don’t think so. I mean PIP is what it is. Is it what people want to buy? I don’t know. Then there’s GLIL and the governance structure around that at the moment couldn’t take in extra funds, so you would need a change there. Could both of those come in as managers through a national collaboration? I don’t know. We’re not at that point yet but nothing is off the table.
What is certain is that there will be a collaboration across the pools in one form or another to look at infrastructure for the UK. Now, none of us, as far as I know, are looking just for a UK infrastructure allocation. Cumbria has a 9% infrastructure allocation and none of that goes to a dedicated UK investment.
At Border to Coast, we are very clear, whatever national platform is built, it will form only a small part of our infrastructure offering.
Infrastructure needs to be global to be well-diversified and cost effective.
Room151: Local government is commercialising rapidly, particularly in commercial property and arguably wants to invest more in infrastructure. Is there scope, given the agenda for LGPS, to invest more in UK infrastructure, to work with local government?
FM: The LGPS will look at everything on a deal-by-deal basis and on a risk/return basis. If there is a profitable deal to be had at the right risk that meets our asset allocation, we’ll take it every day of the week.
Room151: But you won’t be doing local government any special favours? If they can get very cheap borrowing from PWLB, it will be difficult for you to beat that, I suppose?
FM: I cannot see why we would ever be able to offer borrowing at similar rates to PWLB.
But from a pension fund’s point of view, if I can offer a loan to the market for a similar risk level and get more return for my money, why would I give it to the council? That’s not a funds duty.
Some of the deals that Manchester has done, collaborative arrangements between the council, the pension fund and a third party, they make sense. And I think at scale, with resource in the funds, potentially they become a lot easier to do. But they’ll be done because they have the right risk/return for the fund, they give a social benefit for the council and they give a financial return for the third party.
Everybody will have to be clear what each party’s getting out of that deal and those may be different things, but that doesn’t mean that it can’t be a very constructive collaboration. There’s nothing off the table as such, it just has to stack up for the pension fund on a risk return basis, which some of the deals out there currently have proved can be achieved.
Room151: Are you optimistic? After the pools are all up and running, that you’ll be able to achieve sort of the goals that you want to?
FM: I’m very optimistic, yes. There’s an awful long way to go and a lot of tears before then, but the benefits of doing this are huge. Savings is one of them, but for the internal teams, it helps mitigate the key man (or woman) risk. You’ve got opportunity to collaborate in the pool and outside the pool. There’s an awful lot more intangible collaboration going on already because our people meet monthly. So yes, definitely optimistic.
Fiona Miller is head of pensions and financial services, and deputy section 151 officer at Cumbria County Council.