A possible merger of the 34 individual authorities running a pension scheme in London has been on the cards for some time now. Yet the proposal to create a larger, combined ‘London Pensions Mutual’ – comprising 32 London boroughs, the City of London and the £4.5bn London Pensions Fund Authority (LPFA) – has seen authorities at loggerheads over the implications from a political and investment perspective.
“We believe if the merger were to happen you would create a new body to run London pensions.
Mike Taylor
That might look like LPFA but it is not going to be LPFA becasue we don’t have the statutory powers to do all of this.”
A great deal of detail remains to be determined and in reality little has developed around how the investment vehicle might be structured, who might take the helm and whether the liabilities will be consolidated or not. Needless to say, the proposals have led to political wrangling among individual boroughs. Some say LPFA has a political agenda in aiming to be the authority to run the project, while LPFA says it is simply calling for a debate among government ministers and local politicians to discuss the merits.
A ‘smash and grab’ raid
The debate was recently stoked after recently- elected LPFA chairman Edmund Truell set out the organisation’s position on the merger saying the schemes will be consolidated into a single fund which will invest heavily in local infrastructure.
Not everyone is convinced, however. Richard Greening, sub-committee chairman at the £810m Islington Council Pension Fund, has described it as a “smash-and-grab raid” by LPFA. In an interview with portfolio institutional in January, Greening said he believes LPFA sees itself as the “vehicle to take over the whole project”.
He adds: “There are over 30 pension funds being potentially merged, all of which have different assets, liability profiles and funding levels. The idea you could get a single investment approach that will represent best value for each borough’s tax payers and pensioners is a farce.”
LPFA chief executive Mike Taylor is quick to dismiss claims the LPFA has a vested interest in the project, claiming it does not have the powers to run the fund.
“We believe if it were going to happen you would create a new body to run London pensions. That might look like LPFA but it is not going to be LPFA because we don’t have the statutory powers to do all of this,” he says. “We are not trying to take this over. We think 34 is too many and there could be major efficiency savings from running this as one single fund or smaller number of funds.”
Other advocates of the move believe combining the funds would benefit the smaller players through achieving economies of scale leading to potentially reduced manager fees, better performance and shared administration costs. The National Association of Pension Funds (NAPF) has for some time recommended the creation of ‘super trusts’ to help resolve the problems or running small defined contribution (DC) schemes.
But this is predominantly for DC schemes and NAPF policy director Darren Philp accepts the LGPS situation is different: “One crucial consideration is keeping the local democratic link so the operation of these funds is open and accountable to the council taxpayers who help fund them,” Philp says.
Accountability
Perhaps the most contentious issue has been accountability. It remains unclear whether individual scheme liabilities will be pooled or remain segragated. Bob Claxton, head of pensions at the £1bn Wandsworth Council Pension Fund, says there is an issue with pooling liabilities in that schemes with a good funding level would potentially subsidise those not so well-off, while investment strategy would be dictated by one central entity meaning individual funds would have no say on asset allocation.
Uncertainty also persists over how accountable a central entity running an amalgamated fund would be if the fund underperformed. “For the boroughs it is quite clear,” says Claxton. “If we underperform in our pension fund the council will have to put more money in, council tax will rise and the elected members are responsible at the ballot box – there is a clear train of accountability.”
However, Claxton says under a pooled approach this would be less clear cut and unfair: if the LPFA did take over the running of the fund, subsequently underperformed and London council tax payers from across the 32 boroughs had to pay more on the back of it, who would be accountable?
“When was the last time as a citizen of London you voted for who is sitting on the LPFA board?” says Claxton. “LPFA is clearly flagging it wants to take the lot [but] I can’t see it being the vehicle to take this over. Would you give the manager of MK Dons the job as manager of Manchester United?”
Although a decision has yet to be made, LPFA’s Taylor says: “It is essential the liabilities remain as they are so you do not get one borough’s council tax payers being asked to pay the deficit of another’s. You would probably need options on investment strategy which consisted of different asset mixes depending on the individual liabilities of the employer.”
Due diligence
Russell Investments director of consulting Robert Ross believes there is an important due diligence issue at hand because generally speaking the committees that manage most local authority funds are not elected and do not have the in-house expertise to run a pension fund. Therefore, having a centralised, professional body to make investment decisions makes sense.
He says: “With the best will in the world [running the pension fund] is not their motivation for going into local government. It is difficult to get the right people and continuity, as every four years they are up for election.” Ross believes the combined clout of a pooled fund would enable smaller funds to invest in asset classes that require more due diligence, such as private equity and infrastructure, while benefiting from diversification of asset classes and managers. If the right managers are selected it should give better returns and reduce costs, he adds.
LPFA’s Taylor also believes pooling would satisfy due diligence and enable London’s pension funds to invest in more adventurous assets. He cites the example of the $117.1bn Ontario Teachers’ Pension Plan in Canada, which bought a 30-year concession to run Britain’s first high speed railway High Speed 1 in November 2010: “A London scheme of £25bn plus would start to be able to compete for that kind of asset,” he adds.
Claxton agrees collectivisation could benefit boroughs lacking adequate due diligence, but says performance across LGPS has been mixed. “If you look at borough investment performance versus LPFA or the big six funds, over the last three years the boroughs have done better,” he says. “If there are economies of scale, how is that possible?”
According to JP Morgan Asset Management European head of strategy group, Paul Sweeting, amalgamation also contains potential diseconomies of scale when changing asset allocation on a large pool of assets. He says: “If you change your exposure to investment where you hold a significant proportion of the daily liquidity in that investment, eg listed stocks, there is a risk if you move a lot, you risk moving the market.”
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