What else would you look to bring in- house, beyond equity?
We have some private equity, we have some alternatives in some housing and other property that is not in the property fund. If we decided we wanted more exposure to bonds that can be done in-house as well. I think the more you get away from equities and bonds the more likely you are to use some specialist private houses, either as deal sourcers who are just paid to source deals or as co-investors. We recently opened a biomass plant in North Yorkshire where we have allocated funds to a private firm to invest in renewable projects that meet our criteria.
You also have the joint infrastructure fund created between the LPFA and Greater Manchester, which your pooling partners will be joining at some point soon. How does that look at the moment?
We have made some investments. The thing that makes a difference compared to some others that has been said to me is we have committed funds rather than saying, “Oh well, if the opportunity came up we would find some funds.” If you say that but don’t do anything, people don’t take you terribly seriously. Once people know that you are committing half a billion or a billion into a particular space then they begin to come to you with deals and that is what is important about it.
And is it sticking with brownfield projects?
I don’t do investment decision-making, but my instincts are to avoid the very greenfield for all the obvious reasons. If the Mayor of London wants to build more houses I am sure there is a role for pension funds in providing some of that funding, provided we in turn have a reasonable security over the income stream that is coming from the housing.
I think this is one of the aspects of pension funds that people sometimes forget about. They think about paying in contributions and receiving pensions, but it is what the money does in-between that is quite interesting. It could be paying for the student hall of residence that somebody’s nephew lives in or the social housing that your cousin is living in. I think we probably need to try and give a bit more prominence to the things that pension fund money is used for in-between being contributed and being paid out.
There is clearly a gap there between what the government wants and what pension funds are willing to do. They seem to have bridged that slightly with Thames Tideway Tunnel where they gave a guarantee; do you think that will become more common?
I think it will probably happen more. On the energy front or the housing front it doesn’t have to be 100% guarantee, but what we want is a model that you can look at and say, “Right, we are getting the rental income from this estate that we are co-financing that will give us this return plus CPI or RPI, or whatever the deal is every year, and that meets our target for the return that we want.”
When I was at The Pensions Regulator it would only have taken a 100 basis points increase in returns to eliminate most deficits. We are not looking to make 20% a year; if you can get 6%, 7% or 8% return and that’s rising with inflation it goes an awfully long way to tackling deficits, particularly in the current inflation environment.
You’re already in talks with other schemes about joining aren’t you?
Berkshire has made the decision in principle to join. With Manchester it is more likely to be an expansion of our corporation on the infrastructure side. They are already a very big fund and they are working with Merseyside and West Yorkshire at the moment. We do have the infrastructure fund with them and that would be run through our ACS vehicle when we get that. Otherwise Manchester would have to set up an ACS vehicle and there is no point having unnecessary numbers of vehicles around.
Has Berkshire indicated when it is likely to join?
I think they have said April 2018, which is a governance date. It is not impossible that they became a shareholder in April ’18, but they might be an investor through us before then. You don’t have to be a shareholder to invest through our pool. Take the infrastructure stuff for example: people investing in that won’t necessarily be shareholders. So the intention is that Berkshire will become a shareholder in April ’18 but might well put some of their investment to us before then. Are you talking to anyone else? We have also had approaches from or discussions with non-LGPS public sector funds. We have even had an approach for a meeting from some private sector funds that are looking at pooling.
Really? Were they talking about joining with you or advice on how they could do it on their own?
Rather than spend all the money on lawyers getting the same thing said to them they thought they would come and talk to us. If they decide to invest through us we would have to look at how legally that can be done. At the moment it’s an exploratory discussion about what’s involved, but who knows where exploratory discussions go?
Are they looking at industry pooling?
No, it is a number of funds that are already run by the same manager just considering what their options are.
And do you think that could work?
There are almost certainly things we would have to adapt either in the law or to run it as a parallel fund. Again, if you think of it as a spreadsheet and say our main fund has £2bn with an equity manager to manage it a certain way and we have to have a parallel fund that has £200m with the same manager. We would say we want the fee you would charge for managing £2.2bn, not one fee for £2bn and a separate fee for £200m. So we can run things in parallel structures, but still get the benefits of pooled management.
How much of an issue is governance and fiduciary duty when you are setting something like this up?
It is vital you get the governance right. One of the key aspects of our structure is that while our shareholders are represented on the board of the partnership they are not represented on the board of the investment business, which is chaired by Sally. I am on the board of that and Sally chairs it. My shareholders are not because they cannot be involved in making the specific investment decisions as that would breach the SA rules. It is a bit like me saying to Blackrock, “Here is £600bn or £600m whatever number you want to pick, I want you to invest it across these asset classes. By the way can I suggest that you invest some of it to my brother-in-law?” You can’t do that. I have been at discussions where elected members in other councils have queried the degree of involvement they would have in decision-making in the future. Clearly they are uncomfortable at the idea they won’t be involved through investment committees in some of the decisions. They weren’t elected to be investment managers they were elected to be councillors and to act in the interest of their area, not to try and be investment managers themselves.
Where do you look for guidance? Have you looked at how other pooling has worked in other countries?
We looked very widely when we were setting this up as to who was doing it and looked at the Australian, Canadians and the Dutch schemes, with PGGM standing out particularly. My chief exec and company secretary are going to the Netherlands in October to talk to some of their funds and I am in Stockholm in September at a conference with quite a lot of people from the Nordics and seeing what they are doing – and indeed them seeing what we are doing.
Where would you like to see LPP in five or 10 years’ time?
I think it would be the willingness to focus upon illiquid and alternative investments. Recognising that we don’t need all of our assets to be realised tomorrow and putting things into income streams that would produce good returns over long periods of time. That is where I go back to where we began the conversation about not investing in gilts, but investing in something that will give a return.
