British politicians want the country’s public sector pensions to create asset pools of as much as £30 billion ($46 billion) as part of a major overhaul of national investment.
Ministers and officials have held initial meetings with public pension staff to discuss the government’s desire for more collaboration between funds. Chancellor George Osborne set out its ambitions in July’s budget report, stating that pooling investments would “significantly reduce costs, while maintaining overall investment performance.”
“It isn’t about a few funds getting together with £5 billion. £30 billion has been used to illustrate the level of significance the government wants.” —Jeff Houston, Local Government AssociationJeff Houston, head of pensions at the Local Government Association, said the government had indicated in the discussions that pensions should aspire to investment pools of roughly £25 billion to £30 billion. This scale would put the funds in the same league as major European investors such as Sweden’s AP funds and Switzerland’s PUBLICA.
“These figures are ballpark, they are not set,” Houston told CIO. “But it isn’t about a few funds getting together with £5 billion. £30 billion has been used to illustrate the level of significance the government wants. There is no definitive target number.”
Local government pensions in England and Wales have roughly £200 billion in assets, implying a potential end scenario of eight to ten investment pools if the UK pursues this plan.
The proposals were contained in the 2015 Budget“It has to be seen as a move forward from where we were last
year,” Houston said. “A couple of years ago we had proposals to fully merge
funds, then last year we had the idea to move to
passive. The government has now said the sector needs to come forward
with ideas.”
Pension staff have demanded more clarification from ministers about what these ideas should be, Houston added, as well as what help will be given when transitioning to new models.
A formal consultation is expected to begin in October or November of this year.
Meanwhile, London’s 33 public pensions—with more than £25 billion in assets among them—are well on the way to establishing a co-owned investment platform to pool common mandates and invest in alternative asset classes such as infrastructure.
However, Hugh Grover, chief executive of the London Collective Investment Vehicle (CIV) project, told CIO that he doubted the platform would reach 100% coverage of the city’s pension assets in the near future.
“Unless the government pushes a different agenda I don’t see that happening any time soon—and that’s fine,” Grover said. However, he emphasised that the CIV was structured so other pensions outside the UK capital could participate: “In principle, others would be able to come in from day one.”
Separately, the London Pension Fund Authority is establishing a £10 billion partnership with the Lancashire County Pension Fund, as well as a £500 million infrastructure fund with the Greater Manchester Pension Fund, the largest public sector pension in the UK.
Pension funds in Wales were in early-stage discussions over the establishment of a collective investment vehicle until last year, when talks were suspended due to uncertainty over government policy.
UK politicians have repeatedly spoken of a desire to harness pension cash for investment in the country’s infrastructure, and increased scale would be a major boost to this aim. However, investors have urged the government not to treat its pension funds as a cash machine.
Grover and Houston spoke to CIO Europe for an in-depth feature on the London CIV project, to be published in this month’s edition of the magazine. Subscribe now to receive your print or digital copy.
Related: How Not to Merge a Pension Fund