£10B UK Pension Partnership Gets Green Light

Susan Martin, LPFA Susan Martin, CEO, LPFATwo of the UK’s biggest public pensions have formally agreed to collaborate in a £10 billion asset-liability management partnership.

Following board meetings yesterday, the Lancashire County Pension Fund and the London Pension Fund Authority (LPFA) have approved the plans that were initially outlined early in December 2014. Susan Martin, CEO of the LPFA, said the arrangement could save the pensions more than £32 million in costs over the next five years, as well as reducing deficits.

“Both the LPFA Board and the [Lancashire] committee have considered detailed proposals and have agreed that such a partnership would prove beneficial to both organisations,” added Lancashire Director George Graham.

“The partnership will build on the existing expertise across all locations and increase co-operation and collaboration across all aspects of the pension funds, under a strong governance framework,” Graham said. “We aim to provide industry-leading standards of administration and so provide our members and employers with efficient and cost-effective services.”

Never miss a story — sign up for CIO newsletters to stay up-to-date on the latest institutional investment industry news. 

The new entity, provisionally named the Lancashire and London Pensions Partnership (LLPP), will be responsible for investment management and administration of the two pension funds. Together the partnership will serve an estimated 500,000 members and 1,000 employers, roughly 10% of the entire UK local authority pension system, Martin said.

Following the board approval, the pensions will submit applications and a five-year business plan to the UK’s regulator, the Financial Conduct Authority, to establish the asset holding and management entities. They will also establish a six-person board for the project, including a representative from each pension and four independent non-executive directors. The provisional launch date for the LLPP has been set at April 1, 2016.

Other local government pensions have already approached the LPFA and Lancashire to enquire about the partnership, but both Graham and Martin emphasised that further collaboration was a long way off.

“It will be difficult enough to get this off the ground with two pensions,” Graham told CIO. “But the design is such that others can join once it is set up.”

“There are a number of collaborative efforts that have been tried and not worked for some reason,” Martin added. “This partnership provides everything a pension needs, but we are very aware that it is right for our needs. There will be opportunities for others to engage when it is up and running.”

Both pensions were nominated for an Innovation Award at CIO Europe’s awards ceremony in London last month.

PME, the Dutch fund for metalworkers, has halved its costs in five years by selling down complex investments and establishing a core of passive holdings.

The €39.5 billion fund announced this week it had cut asset management expenses to 0.39% at the end of 2014, down from 0.85% in 2010.

During that time the pension reduced its holdings in hedge funds significantly as the costs were not justified, according to PME General Manager Eric Uijen. This move had a major impact on reducing overall expenses, and echoed a similar move by the Dutch health care workers’ pension PFZW.

PME said it was using passive strategies to access “highly efficient” markets such as US equities.

Want the latest institutional investment industry news and insights? Sign up for CIO newsletters. 

“This principle is only waived if expensive active management, in the eyes of PME, adds sufficient value,” the pension said in a statement. High-yield corporate bonds was one area where active management could add value, it said.

PME has been struggling to meet its funding ratio requirements in recent years, and had to cut its pension payouts in 2012 and 2013. At the end of 2014 its coverage ratio was 104.1%, according to its latest report, and the effects of positive investment performance have been offset by falling interest rates. Under the Netherlands’ pension law, defined benefit funds must hold assets of at least 105% of the value of their liabilities.