(November 13, 2013) — A merger between three local government pension funds in the UK could happen as soon as June 2014.
Sources have informed aiCIO that the merger between Berkshire, Buckinghamshire, and Oxfordshire pension funds—first mooted in August 2013—could take place as soon as next summer.
It is understood that the deal could take the form of a collective investment vehicle, rather than a complete merging of the three pension funds, allowing them to pool their assets for greater efficiencies.
Speaking to aiCIO about the rumours, Nick Greenwood, pension fund manager at Berkshire Pension Fund, said it “was possible” that the Berkshire/Buckinghamshire/Oxfordshire union could take place next summer, but stressed there were many more steps needed before a merger was secured.
“We’re waiting for the government to come back with the legal steps [we need to take next],” he said.
“We worked up a rough management business plan, not an operable one, which demonstrated our convictions about the efficiencies of a merger. We then went to our respective cabinets to see their reaction.
“That meeting took place a month ago, and in a month’s time we will meet again to discuss any legal steps to be taken.”
Greenwood said members of the Department for Communities and Local Government “didn’t seem averse to the idea”, and could see the efficiencies to be gained.
aiCIO contacted the Department for Communities and Local Government to ask for further details of the planned merger.
While local government minister Brandon Lewis would not be drawn on timescales, he said: “Local government pensions cost council taxpayers £6 billion a year. Far too much money is spent on administration of these schemes. Consolidation and more joint working can help lower costs and save taxpayers’ money. We welcome representations on the best way to do this.”
Greenwood added that further work needed to be carried out to see whether the funds should “go down the compulsory merger route” or whether they could encourage a “friendly merger”, as Gwynedd County Council Pension Fund has with its common investment vehicle approach for Welsh pension funds.
UPDATE: 15 November, 2013 — Since the first publication of this article, aiCIO has since spoken to Greenwood, and now understands that while his team has considered collective investment vehicles as an option, they are “not actively pursuing it at the moment, as we feel there are greater savings to be had from the complete merger of the funds”.
The merged entity would manage a combined £5 billion in assets under management. The representative members have spent two years talking about combining their funds.
The majority of savings from a merged entity were likely to come from investment management fees, Greenwood said. “We also think it makes for a more resilient structure on the strategy side, it will lessen our key man risk,” he added.
All three pension funds recorded an actuarial deficit in their most recent annual reports. At their last actuarial evaluations in 2010, Berkshire pension fund had assets of £1.3 billion and a deficit of £311 million, giving it a funding ratio of 81%.
Buckinghamshire also had a £1.3 billion pension fund, with a coverage ratio of 75%, resulting in a deficit of £344 million.
Oxfordshire had £1.1 billion in assets, a coverage ratio of 79%, and a deficit of £287 million.
On investment management fees, which the combined unit would hope to reduce, Berkshire spent £3.2 million in fund management fees, £2.1 million of which was spent on investment manager fees, in the year to March 2012.
In the same period, Buckinghamshire spent £2.7 million on investment management expenses, and Oxfordshire spent £2.2 million.
A previous attempt by the London Pension Fund Authority to combine 34 of the UK capital’s pension funds earlier this year has, at least for the time being, hit the buffers.
Is Bigger Always Better?
However, not everyone’s convinced that bigger pools of assets always lead to lower fund management fees.
John Finch, director at JLT Investment Consulting, told aiCIO the savings investors thought they could get by scaling up often aren’t as big as they had hoped.
“Within deep, liquid markets, there is a strong element of truth to the argument that you can get lower costs by merging funds,” he said. “Asset classes such as UK and US equities with large cap stocks would work.
“But at the smaller end of caps, you will hit problems because there simply isn’t enough volume. And in more niche areas of investment, such as frontier markets, there comes a point where you have limited capacity.”
Looking at frontier markets as an example, Finch cited HSBC Asset Management’s current drive to place £600 million in frontier equities.
“If you’re sitting there as an asset manager, do you want £600 million all from one merged client, who will put pressure on me to lower my fees? Or should I take smaller amounts of several clients at the normal fee rate? And I can charge more for the manager research I will have to do for each client,” he explained.
It is also a big business risk for a manager to place a niche offering such as this with only one client, Finch continued.
Finch referenced an unnamed infrastructure manager who is currently seeking to raise £400 million, and has offered a 2/3 discount on the original fee amount if several local government funds pool together to produce the full £400 million.
“Collaboration between local government funds is much more interesting than a merger of funds,” he said. “If they were more collaborative, you could see greater efficiencies without having to compromise anyone’s strategy.”
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