Given the number of initiatives the government has for the local government pension scheme (LGPS) system there was always going to be a moment of truth where the government instigated something that conflicted with the pension pools.
That moment seems to have arrived, with the pensions minister Torsten Bell and minister for local government Jim McMahon writing to tell two pools – Access and Brunel Pension Partnership – to merge with another LGPS pool.
In essence, the government has completely rejected the independent vision both pools presented as part of the government’s consultation LGPS: Fit for Future, informing them instead to take the merger route.
Access has £52bn worth of assets under management and includes the local authority pension funds of Cambridgeshire, East Sussex, Essex, Hampshire and Kent among its partner funds, while Brunel manages £37bn for Oxfordshire, Avon and Gloucestershire.
Access revealed there are big cost implications to such a merger. In a statement it said there is “significant cost and risk associated with merger with either local pension partnership or Border to Coast”.
Access estimates transition costs between 28 and 36 basis points of the value of active listed assets pooled, equivalent to more than £100m, consistent with “multiple external sources of evidence” and in line with the estimates of other pools who also did not propose a merger.
The government though did not accept this number.
In response, Access said: “Access notes with concern that the government’s rejection of our proposal attempts to downplay significant cost considerations – without supplying its own analysis or counter-factual evidence – nor proposing a framework for how costs will be compensated in the event of undesirable pool or fund level mergers.”
Access is, therefore, “extremely disappointed” that the government has “chosen not to support our intention to build our own FCA-regulated investment management company at a time when other similar proposals have been given the green light.”
Access added that it had “established that the costs of merging far exceeded our proposed built model – unnecessary expenditure of tens of millions of pounds and a financial burden on our scheme members which could alternatively be used to invest in UK productive finance initiatives”.
Time to consider
Laura Chappell, chief executive officer of Brunel Pension Partnership, said in a statement: “We are now taking some time to consider next steps with our partner funds.”
And she added: “Our partnership has succeeded across multiple agendas since inception: transition of assets, governance, asset class range, responsible investment, and UK impact.”
Chappell also noted: “Across these criteria, Brunel has been a pooling success, and we are determined to ensure that success continues. Fundamentally, our purpose is to enable our clients to meet their fiduciary duty to their members and this remains our core focus.”
Matthew Trebilcock, head of pensions at Gloucestershire Pension Fund, also expressed support in what Brunel has done as a pool.
“Our partnership is built on a shared vision and shared priorities,” he said. “We co-ordinate very closely to achieve our goals and it is crucial that any structural changes enable this momentum to continue rather than be delayed.”
The government has set a September deadline for the mergers to be achieved.
That is quite a tight deadline, given both pools now face something of a governance nightmare, as they need approval from their own partner funds, as well as a thumbs-up from the partner funds of a pool they may join, for everything to run smoothly.
It is likely to be the first act in a long-drawn out drama on the future of pension pooling in the UK.
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