Quickfire pension Q&A with LB Bromley

Members at the London Borough of Bromley recently decided to overhaul the Council’s long standing pension fund asset allocation strategy. We spoke to Principle Accpountant, Martin Reeves, about the forthcoming changes.

Room151: What does the pension fund currently look like?

Martin Reeves: Since the late 90s we’ve had a two manager structure. They both ran balanced mandates of about 80% in equities and 20% in bonds. The equities were part UK and part oversees but over the period we had quite strict regional allocations so the managers weren’t able to go and invest with entirely who they wanted. They had a degree of flexibility within those regional allocations but not a great deal.

Room151: What’s prompted the change in asset allocation?

MR: Actually our returns historically have been pretty good so we were tempted to say “if it ain’t broke, don’t fix it”, but certainly in the last 18-24 months equity returns have been pretty dismal and the fund’s performance has suffered so we’re trying to hedge against that by doing things a bit differently.

Room151: What does the new asset allocation look like?

MR: It’ll be 10% Diversified Growth Funds (DGFs), 70% global equities – where the managers will effectively have carte blanche to invest where they want – and we’re looking for some protection with the remaining 20% through bonds.

Room151: What do you expect to get out of DGFs? 

MR: Returns. That’s the main thing. One of the other big attractions is that they will have allocations to a variety of different investments. There was pressure building from members to go into property and DGFs can include some property, depending on which funds we go for.

Room151: I see. So rather than investing in a range of alternatives, you’re wrapping that allocation up into one structure?

MR: Correct.

Room151: Clearly you’re keeping faith with the equity risk premium – still 70% – were you not tempted to diversity further?

MR: We looked at that. We still think though that if you look at all the historical returns across asset classes then equities is the best bet. We’re looking for long-term growth that will best match our long-term liabilities and so I think members felt we would most likely get that from a strong growth component in the portfolio in the shape of equities.

Room151: When do you start looking for new managers?

MR: We’re still at the very early stages. Our members only agreed to this back in May and we’ve appointed Allenbridge Epic to assist us through the process. We’ve just had a meeting with them and they’re about to do their first bit of work on it. We’ll draw up a long list of managers, then whittle that down and then have a beauty parade. We’d hope to get the new managers on board by early next year.

Room151: How many managers do you expect to appoint for each of the asset classes?

MR:  I wouldn’t want to pre-judge the process but I suspect two DGF managers, three or four global equity managers and a couple of bond managers. I think we’ll end up with between six and eight manager in total and they’ll probably get a minimum of a three year run at the outset.