It would be fair to say that while we have yet to see any truly radical developments following the Conservatives election victory in May, their first 100 days in office have delivered some meaningful developments for the Local Government Pension Scheme (LGPS) and telling signs as to their likely future direction on public pensions more broadly.
George Osborne’s Summer Budget did not deliver the root-and-branch change that some commentators and LGPS colleagues may have anticipated; however, it did represent a tangible move in direction and a stepping-stone from which we can progress.
The government’s renewed commitment to working with the LPGS – specifically rewarding ambitious funds that work to deliver strong investment results and carefully manage their costs, while at the same time taking more direct action with those who are not performing adequately – is likely to be warmly received by those striving to operate within a fully funded, deficit free system.
Justifiably, however, concerns within the LGPS regarding excessive governmental intervention have long been held, with particular fears around a ‘one size fits’ all solution being forced upon all of its highly individual 89 funds. However, the government’s more subtle initiative – a ‘tip of the hat’ to funds that are proactive in seeking to collaborate to manage their liabilities and investment costs – should help to mollify these fears.
From the LPFA’s perspective, we consider this a vote of confidence to our own partnerships with Lancashire County Pension Fund and Greater Manchester Pension Fund.
The rewards of pooling are widely recognised. Through pursuing cooperative partnerships with well-matched funds, we can build economies of scale, undertake a greater amount of direct investment, thereby achieving cost reductions in administration and more effective liability management, and also access different types of asset classes.
Particularly interesting to us is infrastructure investment, which we see as very much a win-win. Infrastructure provides pension funds with the long-term, liability matching returns they require to satisfy future pension payments, at the same times as delivering the UK with much-needed capital to support its infrastructure, generating both an economic and societal return.
In spite of this though, a look at recent developments in the infrastructure sphere shows that the LGPS, and therefore UK pension holders, are missing out on investment opportunities in this area.
Just this summer for example it was announced that Chinese, Qatari, Canadian and Spanish sovereign wealth and pension funds are the Airport Commission’s preferred backers for the proposed £18 billion new runway at Heathrow, while a Kuwaiti-Canadian-Australian consortium is also expected to be a leading bidder for London City Airport.
The central issue here is of course scale. To be able to take on such infrastructure projects, individual funds within the LGPS need to work together. Only by collaborating, by sharing our expertise and experience and by pooling our resources will we be able to compete with sovereign wealth funds from around the globe.
It was with this in mind that last year we entered discussions with the Lancashire County Pension Fund. I’m proud that, as announced at the start of July, these pioneering initial conversations have evolved to the point where we have now received approval from the LPFA Board and Lancashire’s Pension Fund Committee to pursue our collaboration in earnest.
Providing both jointly managed administration and pooled asset and liability management activities through newly created corporate structures, our partnership will cover all aspects of pension fund management and be a fully-fledged pension service organisation. It also enables both funds to retain local accountability and sovereignty.
Once operational it will service half a million members and work with one thousand employers – approximately 10 per cent of the LGPS. Our long-term vision is to expand the partnership from £10bn to £40bn, both organically and through bringing in other LGPS and public sector funds once it the structure is successfully in operation.
As the business and investment spheres become ever more global in nature, it is vital that UK funds are able to compete with the world’s best and largest investors. Rather than being considered minnows with neither the capital nor the expertise required to make large scale investments, collaboration presents the opportunity for funds to grow their collective stature and make a real different both to pension holders and to the UK economy at large.
Susan Martin is CEO of LPFA
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