Council pension ‘pools’ in England and Wales reject authorities push to merge | USAEMALL.com

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The eight investment vehicles that manage pension assets for town halls in England and Wales have told ministers they want to remain independent entities, in a setback to the government’s plans of driving economies of scale.

The “pools” that manage money for the £392bn Local Government Pension Scheme (LGPS) told the Financial Times they had presented the government with a business case for why they would deliver best value by operating independently.

In letters to ministers, the investment vehicles, which manage pension assets on behalf of 6.7mn people who work or worked mainly in the public sector, have outlined plans for how they could adopt new requirements laid out by the government last November. 

The government has said all 86 local authority funds must hand over all of their assets to their partner pool, and that the pools must be set up as investment management companies authorised and regulated by the Financial Conduct Authority, with expertise and capacity to implement investment strategies.

In a letter to the eight pools in December, then pensions minister Emma Reynolds and Jim McMahon, local government minister, said the government did not plan to legislate “to force pools to merge . . . instead, the onus is on you to bring forward ambitious plans for the future”.  

Reynolds and McMahon invited “careful consideration of whether eight separate entities working in isolation is in the best interests of the LGPS as a whole” in the letter seen by the FT.

Each pool was asked to show by March 1 why merging with another pool, or use of an existing capability in an established pool company, would not be a more efficient and preferable way to comply with the government’s reform proposals.

Three of the pools — ACCESS in southern and eastern England, Northern LGPS and Wales Pension Partnership — are set up as joint committees of their underlying local authority funds.

ACCESS and WPP said they were seeking to register as investment management companies authorised by the FCA, and looking to hire executive teams and boards to run the new firms. 

“It was the joint committee’s unanimous view that the ‘build model’ was the most appropriate proposal to government for ACCESS”, and that it was the “least expensive” option to meet ministers’ criteria, ACCESS said.

The pool, which employs seven people at present and now manages £52bn of assets, said setting up the investment management company would cost low tens of millions of pounds but that merging with another would cost “nearly double” in one-off expenses.

WPP, which oversees management of £25bn of assets and employs one person, is also rapidly adapting its model in order to become an FCA-regulated entity. 

“We’ve been engaging with the other pools on an informal basis and a merger is out of the question for us . . . it’s too expensive” said Anthony Parnell, pension investment manager at Carmarthenshire County Council, host authority for the WPP.

Converting WPP into an investment management company would make it “more expensive than the current model”, he added, though his team were committed to the government’s proposals and had been “working flat out to get ready”. 

Northern LPGS declined to comment, but people with knowledge of the matter said its transition proposal to government laid out how the pool could become an FCA-authorised entity. This was viewed as preferable to merging with another pool but not Northern’s favoured outcome.

Responding to a government consultation last month, the pool said requiring authorisation was a “great disservice” to the three funds in its pool, which already had a “strong internal investment management functions without needing authorisation”. 

Last autumn Reynolds told the Financial Times that her goal for the pools was to “professionalise and drive economies of scale”.

“The bigger the pools, the better the governance, the better deals they can drive,” Reynolds said, adding that she was “not uncomfortable” with eight pools continuing to exist but “there could be fewer”.

Torsten Bell, current pensions minister, has been a vocal supporter of local government pension scheme reform, and said before he took the job that assets held across the 86 local councils of England and Wales “should be brought into one consolidated fund”.

Heads of other pools have indicated further consolidation could boost the system’s efficiency. 

“Ten years ago the LGPS arranged itself into eight pools. That was because that was the way LGPS felt at the time . . . it’s not to say those eight are still right now,” said Rachel Elwell, chief executive of Border to Coast, which manages £52bn of assets. 

Chris Rule, chief executive of Local Pensions Partnership — a pool that is already FCA-regulated and operates as a fiduciary manager, making it most closely aligned with the government’s plans for the pools — said “all pools should be working towards £100bn plus of assets”.

Hitting this figure would make them “30 per cent cheaper to run”, he predicted. LPP manages £23bn of assets.

The Treasury said: “Consolidating all assets into a handful of professionally run, better governed pools will unlock the full might of the £392bn LGPS to act as an engine for growth while always acting in the interests of members, employers, and local taxpayers.”