(January 6, 2014) — London’s local authorities have effectively dumped pension merger plans and asked industry professionals to assist in shaping the future of London’s Local Government Pension funds.
London Councils set noon today as the deadline for interested parties to apply to help create the business case for a Common Investment Vehicle (CIV) that would be available to the capital’s borough pension funds. At a meeting on December 10, London Councils’ Leaders’ Committee said they were only interested in looking at the details of implementing a CIV, effectively dismissing a merger of the 33 borough schemes.
This started the ball rolling, and quickly.
“I am pulling together a project team and it certainly feels like the necessary legal structures and frameworks are in place,” Hugh Grover, director of fair funding, performance, and procurement at London Councils, told aiCIO.
Grover has set out a short timetable by the end of which the CIV could be up and running assets.
“Our target of nine months is ambitious—it is difficult to tell yet whether we can do it that quickly—this plan assumes all members are happy with the business case,” Grover said. The writing of a business case has been agreed—and funded with at least £25,000 per member—by more than 21 of the 33 London boroughs.
There had been four potential models presented by PWC to the boroughs. Now there remains just the CIV option that they were the happiest to explore.
Last year, Berkshire, Buckinghamshire, and Oxfordshire council pension funds announced plans to explore a similar CIV structure. Several Welsh plans have also taken part in a comparable vehicle launched by the Gwynedd County Council Pension Fund.
“There is no fixed commitment to the model at this stage,” Grover said. “Leaders cannot sign off a firmer decision as a lot is dependent on an ongoing government ministers’ evidence gathering exercise that could see them also pursuing a CIV.” Should the government choose this option to pursue as well, the London boroughs’ work would be duplicated.
London Councils has written to the ministers and departments involved to inform them of its progress.
Grover explained how the CIV could work: “At the outset, the CIV would implement less exotic investment options by swiftly moving into passive strategies, which most pensions already use. After establishing these, we would develop others.”
The government’s new Authorised Contractual Scheme (ACS) has been chosen as the preferred vehicle in which to host the CIV. As aiCIO reported last year, the set-up would allow institutional investors a way to keep their assets onshore, but with greater tax efficiency than has been previously available.
The model, which was suggested to Grover by an industry expert, continues the basic thesis behind greater collaboration across the capital’s pension funds.
“The main benefits of the CIV are to cut down on costs,” said Grover. “If there are 33 pensions all paying to procure and be managed in passive funds separately, using a collective fund automatically makes a saving.”
Also, some boroughs might achieve better returns through a CIV, Grover said, “and it would allow smaller scale investors to access some larger direct investments, including infrastructure, where the costs often preclude investment from anyone but the biggest funds.”
Grover and the appointed experts will not examine whether the CIV could take on additional services for the pensions, such as fund administration. “We are keeping the discussion very simple at the moment and concentrating on collaboration across funds,” he said. “We have also not looked at the detail about who would manage the funds—whether it would be done internally or externally—we are keeping to the basic discussion on the CIV itself for the moment.”
London Councils cannot create and run the CIV. The organisation would put together the legal framework within which the fund would operate but it would be contained in an independent limited company.
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