As the decision pre-dates the Chancellor’s proposal, what were the reasons behind the move?
Yes, this has been planned for over two and a half years. London and Lancashire came together because when they looked around at the investment philosophies that were out there they found they had very similar ideas. Both were already investing in alternative assets streams rather than in gilts and neither has any great passive investments, whereas a lot of other funds were at least and still are, quite gilt driven and quite passive driven. There is no point partnering with somebody whose investment philosophy you don’t share.
I suppose that will dictate the type of scheme that joins.
It will do, although there is a wrinkle that maybe people haven’t thought about too much. I don’t think across eight pools there can be eight different infrastructure specialists and eight different private equity specialists. I think you would find that over time certain pools become used by other pools for particular asset classes. We already have a partnership with Greater Manchester on infrastructure. We have recently announced a property fund that is managed by Knight Frank. We can easily see that while other pools might not join us legally, they might well invest through us and do some of the things we are doing.
So there will be cross-over and sharing among the pools?
Yes, I believe it is going to be more like that than separate pods, like a latticework. There are not that many infrastructure specialists or private equity specialists around. For LGPS to think it can have eight separate groups of them I think would be wrong. We have already found the benefit of bringing the two investment teams together. It is not just that there are more people it is that there is more exchange of ideas and people saying, “I hadn’t thought about doing it that way, tell me more about why you did it that way. Okay, I get that.” They are learning and developing each other. Rather than have two people doing all the investment or outsourcing the entire thing to external managers. Being able to have a bigger team gives us the opportunity to attract more people to have more fulfilling career paths for them within the partnership. To have that intellectual exchange that makes for good investment management.
You have attracted some high level names, yourself included but also Sally Bridgeland (chair of the investments board), Chris Rule (managing director (investments) and chief investment officer) and others. What was it that attracted you?
It is really very simple: I believe in what they are doing. When I was at The Pensions Regulator (as chairman) I argued for consolidation among schemes. There are 145,000 people who are pension trustees, but in my view there aren’t 145,000 people who are qualified to be pension trustees. Pensioners and employers would benefit from having fewer schemes that are better managed. Having articulated that when I saw the advertisement for this and various other friends who saw it and emailed and text me to say, “You should look at this, it has been tailor-made for you.”
You said on the website that you want to create a best in class end-to-end pension service. How far along with that plan are you?
There would be no point in having brilliant asset and liability management if we couldn’t make payments to pensioners. We have been very clear that as we do this fancy stuff the basics still have to be done.
Part of what we were very clear about is while we will manage a lot of this centrally there will always be a local interface for people so they don’t have to call up a call centre and get somebody anonymous on the end of the phone.
Schemes joining won’t cede all responsibility then?
Well they still have the legal responsibly. The Wandsworth and Richmond one is interesting because they have applied for permission to merge more formally. Within the LPP, if I take our case the Lancashire County Pension Fund remains in existence. They are the pension fund, we are not. We are the asset and liability managers. I treat them as clients and it is my job to service them.
I attended the annual general meeting of the Lancashire County Pension Fund membership and about 300 of them turned up. I was just there to answer any questions they had about what was going on.
Economies of scale are most obvious on the investment side, but can you make a difference to administration costs too?
I think our admin costs are about £9m a year, but we think we can take a couple of million out of that over a two-year period. The business plan hasn’t defined that ambition yet because they are a bit more cautious, but they are the discussions we have been having. On the investment management side it is both through reducing costs but also through increasing return. I am quite happy to add cost if it increases return further. If paying a bit more for better fund management gets me significantly better returns I will pay it, but it will be performance-linked. We have taken out some cost already just by being able to negotiate better and by taking some activities in-house.
So what has been brought in-house so far?
When the LPFA brought its equity portfolio in-house it saved roughly £3m of a historic cost of £4m. Going forward, LPP is looking to save £6m per annum on equities alone. We now have £933m – about 20% – of equity run in-house, but are likely to bring more in-house as we grow the team. I don’t have an ideological or theological position on how much is in-house and how much is out-house, it depends on the terms we are getting and the costs involved. It depends on the sorts of deals they offer and on the mandates given to us by our shareholders. If they say, “We want you to invest 5% in emerging markets,” we might conclude that the people managing our existing fund are not the people we would choose to manage an emerging market strategy and pick a different fund manager for that. We announced a couple of weeks ago the £1.2bn property fund managed by Knight Frank, so we are very willing to use specialist expertise where it’s more appropriate.
