The London Pensions Fund Authority (LPFA) was at the forefront of discussions over asset pooling in the UK long before it became government policy. Chief investment officer Chris Rule and investment committee chairman Tony Dalwood tell Sebastian Cheek about the fund’s plans for facilitating collaboration between local government pension schemes.
What are the benefits of pooling assets?
Chris Rule: The main benefit is that economies of scale bring down fees, principally in the form of investment management costs we pay to third parties, but it also reciprocates into other services whether IT systems or premises. Our total cost is around £32m a year, the vast majority of that is investment management and we have estimated conservatively we will be able to save 10-20% of the costs we currently pay to managers. A much larger part of the reduction in overall
costs will come from the internalisation of some of that management because when we manage the money for ourselves we are not doing that for profit. Also, by having a larger pool of assets we can broaden the opportunities we can invest in, especially in illiquid markets and expect to improve our gross returns.
What is the intention of the London and Lancashire Pensions Partnership (LLPP)?
Tony Dalwood: When we started out on this journey the vision was to provide a ‘platinum platform’ of philosophy, process and people and we hope the current partner we have in Lancashire and other [LGPS funds] will say that is something they aspire to. The philosophy is about matching what our members/pensioners want over a 10, 20, 30-year time horizon. While the standard fund management market may talk about three, five, 10-year horizons, the reality is they measure over three, five, 10 minutes and if we reduce fees and compound that over 20 years, that is substantial. It is also about how we match assets with liabilities
and over the last 10 years the growth in alternatives has meant the ability to asset/ liability match has increased dramatically.
CR: We are pooling assets but also pooling people, so today I am CIO of LPFA, there is an investment team within LPFA and we work with our investment committee which Tony chairs in order to set the investment strategy and implement that on behalf of LPFA. There is a very similar parallel set-up within Lancashire Pension Fund where you have investment professionals working with councilors. Within the new pooled set-up we will have a single organisation and a single investment team with a governance framework overseeing day-to-day implementation of the investment strategy, but the two funds will remain
separated and sovereign in terms of their strategic asset allocation.
How do you see LLPP fitting in with the government’s plan to create six British Wealth Funds?
CR: The Chancellor has been very clear he wants the 89 LGPS funds to become six or so and that means you need pools of £30bn-odd to be of critical mass as far as the Treasury is concerned. The LPFA believes bringing extra scale will bring benefits to the pension fund. So our role is to create the infrastructure that facilitates other partners coming in and working alongside us and creating those larger pools of assets. We would hope to be one of those six and we are certainly opening up our shop-front and showing people we can offer them something which is attractive.
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