Councils discuss new pension investment body

A group of local government pension fund directors will gather on Friday (21 August) to discuss radical proposals to create a mutually-owned investment management body, Room151 has learnt.

The move is being proposed in response to a government call announced in the Summer Budget for local authorities to come up with ideas to pool more of their pension investments.

It is understood that many in the sector are unconvinced about the benefits of fund mergers, and hope an alternative proposal for a new council-run investment management firm could achieve the government’s stated aim of reducing the sums spent on management fees.

A source with knowledge of the meeting, who wished to remain anonymous, told Room151: “The idea under discussion is that the best solution might be for councils to create a collaborative model which allows individual funds to remain segregated.  The idea of a single collective investment fund for a particular investment type could become a political nightmare.”

The source said that authorities are worried that larger pooled funds could wield too much power in the market, meaning they could be faced with making controversial political and business decisions on behalf of companies in which they own stakes.

He pointed to the controversial sale of confectionery firm Cadbury’s in 2010, where Legal & General Investment Management was the biggest shareholder.

In addition, proponents are understood to believe that such a vehicle could help reduce fees more than through the creation of collective investment vehicles (CIVs).

The source said: “Creating a collective investment vehicle (CIV) involves two sets of management costs – firstly to a set of external investment managers appointed to manage the investments, and then in fees on the individual funds these managers invest in. It could be possible to take out one of those layers.”

The meeting is set to discuss a range of options for collaboration, ranging from the joint procurement of due diligence on private equity funds as well as the mutually-owned investment management company.

The gathering will take place immediately after a meeting in London called by the Local Government Association to discuss responses to the government’s call for greater pooling.

In July’s 2015 Summer Budget, chancellor George Osborne announced that the government will work with LGPS administrators to “ensure they pool investments to significantly reduce costs”.

It said it would publish a consultation later this year setting out detailed criteria for the proposals – alongside “backstop” legislation “which will ensure that those administering authorities that do not come forward with sufficiently ambitious proposals are required to pool investments”.

It is understood that a number of pension funds, along with the LGA, met with Treasury and Department for Community and Local Government officials earlier this week to discuss the detail of the government’s criteria for reform.

John Harrison, director of multi asset at Henderson Global Investors, said the government risked “undesirable outcomes” if it rushed the proposed reforms.

He said: “Traditional assets, such as equities, have done well in recent years, thanks mainly to quantitative easing. However, now that support is coming to an end, there could be less certainty about those types of investment.

“A push to pooling and passive investment runs the risk of disincentivising funds from exploring sensible diversification because such moves would likely incur higher management fees.”

He said that the industry had made good progress in recent years in reducing LGPS management costs but this had “not been deemed quick enough” by government.

Photo (cropped); Digital Internet, Flickr.