How Not to Merge a Pension Fund

Spare a thought for Nick Greenwood.

A year ago, the manager of the £1.6 billion ($2.4 billion) Berkshire Pension Fund was spearheading a move to pool assets with those of the neighbouring Oxfordshire and Buckinghamshire councils. If successful, the combined £5.1 billion entity would have had better bargaining power with investment managers and better protection from key man risk, Greenwood told CIO in January 2014.

A little over 12 months later, and the plans have been shelved, probably never to be resurrected. Officially, Oxfordshire and Buckinghamshire were spooked by the UK government’s controversial proposal to force local authority pensions to invest passively.

“The council is awaiting an expected announcement by central government on whether it will in future require Local Government Pension Scheme funds to use passive investment for all listed shares,” a statement from Oxfordshire read, “as this will significantly impact the financial business case for future collaboration.”

“A requirement for passive management will significantly impact the financial business case for future collaboration.” —Oxfordshire County CouncilBut as forced passive management is looking increasingly unlikely, according to several public pension insiders, what was the real reason for the collapse? And how can others avoid similar problems?

Project BOB

Collaboration is catching on among UK public pensions.

The London Pension Fund Authority (LPFA) is leading the way with two major projects: investing alongside the Greater Manchester Pension Fund in an infrastructure fund, and exploring the creation of a stand-alone asset manager with the Lancashire Pension Fund.

London’s councils are slowly moving towards pooling their assets in a collective investment vehicle to benefit from greater scale and bargaining power.

The Berkshire, Buckinghamshire, and Oxfordshire collaboration—internally dubbed “Project BOB”—was similar to the LPFA’s planned link-up with Lancashire. It even had a name: the Chilterns Local Government Pension Fund, after a stretch of hilly countryside that reaches across all three counties.

According to documents sourced from various council websites, the plan was to pool assets and negotiate mandates collectively. Each of the three pensions would use the pooled funds as they saw fit to meet their own needs, in much the same way as the UK’s Railways Pension Scheme invests centrally on behalf of dozens of pensions.

Berkshire’s Greenwood, an enthusiastic advocate of the Project BOB collaboration, told his fellow pension panel members at a December 3 meeting that the LPFA-Lancashire deal was proof the project could work.

But by this point the cracks were showing. Councillor John Lenton, chair of the panel, claimed his counterparts at the Oxfordshire and Buckinghamshire funds appeared “less interested in costs savings than I expected”. Greenwood told the meeting he had received “no clear signal” from Oxfordshire’s pension staff that they were keen on the deal, despite months of discussions.

“It is clear that both councils have no intention to collaborate with [Berkshire] on managing pension funds.” —Nick Greenwood, Berkshire Pension FundIn the same week as Berkshire’s pension committee voted to push ahead with Project BOB, 35 miles to the north-west, Oxfordshire county council’s pension fund committee also met to discuss the proposals—but they were heading in the opposite direction. A report from a December 5 meeting actively questioned Berkshire’s suitability as a partner in the deal.

“The consensus was that Buckinghamshire had similar structure and aspirations to Oxfordshire and would be a good partner,” the report said, “whereas Berkshire [was] different and probably wouldn’t be a good choice of partner.” This is despite Greenwood explaining in a November 17 meeting between the three council pensions that the pooled assets would still be flexible enough to meet the varying needs of the pension funds.

An hour’s drive to the east, Buckinghamshire County Council’s pensions committee had reached a similar conclusion. A spokesperson for council told CIO that the pension fund was “uncomfortable with the difference between the Buckinghamshire and Berkshire strategies and the level of benefits that can accrue as a consequence”.

Berkshire’s Greenwood declined to comment further when approached by CIO, but in a report published last month his frustration at the other councils’ reluctance to engage was evident.

At the November 17 meeting, “at least one council disputed that investment manager fees were negotiable for larger transactions,” Greenwood wrote, despite a great deal of evidence to the contrary. Efficiency was a key reason for collaboration, as was the mitigation of key man risk—which was also played down by the other participants.

The final straw came just before Christmas. While Greenwood and his colleagues were attempting to persuade Oxfordshire and Buckinghamshire of the benefits of Project BOB, the two councils—not, it must be added, their pension fund managers—were in wider-ranging talks with Northamptonshire County Council. On December 16, these three entities announced the creation of a larger combined authority to pool local government resources—“which presumably in the longer term would include pensions”, Greenwood wrote in January.

“No mention of these discussions was made at our November 17 meeting with the two councils,” he added. “Consequently it is clear that both councils have no intention to collaborate with [Berkshire] on managing pension funds.”

A spokesperson for Buckinghamshire County Council denied the two sets of negotiations were connected.

How Hard Can It Be?

Susan Martin, CEO of the LPFA, is overseeing two major collaborations with pension funds in the north-west of England.

“We know it’s not going to be easy, and we are learning from mistakes.” —Susan Martin, LPFA“It can be hugely complicated,” she tells CIO. In teaming up with the Manchester and Lancashire pensions, Martin says the LPFA has ensured it is working with teams they “understand and respect”.

“We know Lancashire and Manchester very well and have worked with them in the past,” she explains. “It’s important to know them beforehand, understand their philosophy, and understand and respect the people. We know it’s not going to be easy, and we are learning from mistakes.”

Also in London, Hugh Grover is busy with the construction of a collective investment vehicle. Instead of partnering two or three funds, however, Grover—local government finance policy director at London Councils—is trying to bring together the pension committees for the 33 boroughs of the UK’s capital city. Grover and his team hope the vehicle will allow the pension funds to pool common mandates and negotiate lower fees.

“Change management is never easy,” Grover says. “A key part of bringing people together is finding common ground. For the London boroughs, this has been the desire for more efficiency and finding more buying power together. But it’s not easy, particularly in this environment—there are an awful lot of stakeholders.”

Both Martin and Grover are prepared for long, slow journeys towards their goals, but are both positive that the collaborations will work—provided that patience and a shared goal are kept “front and centre” by the parties involved.

Project BOB may be all but dead in the water, but with the UK government pushing public sector pensions to find new ways of saving money, it is increasingly likely that other proposals will emerge.