News analysis: Gwynedd County Council Pension Fund has taken steps towards establishing a common investment vehicle with other Welsh schemes, as public schemes investigate consolidation to provide savings and higher investment returns.
The local government scheme, on behalf of the Welsh Local Government Pension Funds' Working Together project, issued a tender for a business case on the establishment of a common investment fund for eight Welsh pension funds.
If you look at where the benefits of scale are, they are largely on the investment side
Caroline Roberts, investment manager at the scheme, said it was part of an ongoing project between the eight Welsh funds that examined the areas of consolidation that would bring the most savings and returns for the schemes.
“The investment area was seen as the best area to get returns,” she said. “Right now we are looking at the overall business case for common investment vehicles and whether specific asset classes would offer better returns.”
This comes the month after the Department for Communities and Local Government issued a similar tender for professional advice from “financial market experts”, such as banks, actuarial firms or think-tanks.
Advice is being sought on the potential for new savings and greater public accountability through increased pension fund collaboration.
The commissioned work will focus on three possible options: a single national investment fund vehicle; a small number of closely aligned combined investment vehicles; or merging the UK schemes into a few larger funds.
John Wright, head of the public sector team at consultancy Hymans Robertson, said the government is looking to see if there are any benefits of scale in the LGPS, and the options they are considering are full fund mergers or pooling the assets only.
"If you look at where the benefits of scale are, they are largely on the investment side," he said. "In monetary terms there is potentially more value to be had in terms of improving performance and efficiency, just because of the scale of investments and fees paid to fund managers."
The focus has been on the investment side and not on the administrative side, Wright said.
“Some if not most of the benefits of scale that you might get through fund mergers may be achievable through pooled assets without physically merging the funds,” he said. “It is possible that some of the drawbacks of fund mergers may be avoided.”
The LPFA's proposal
Earlier this year, the London Pensions Fund Authority recommended the consolidation of assets into “super pools” across the UK, with values of £20bn to £30bn each.
The scale afforded by super pools could reduce costs, allow for in-house investment teams, investment in new asset classes and the ability to manage liabilities more tightly, said Susan Martin, interim chief executive at the fund.
“A super pool is not a fund merger and it is not a collective investment vehicle, and it is not a sharing of procurement approach to fund managers to reduce costs,” she said.
The proposal is to have the administration, investments and liability management run centrally, while responsibility for the historical deficits and investment oversight would be held locally.
“[What] we picked up in discussions with our colleagues in local authorities – [is] that it is really important for them to have local involvement,” Martin added.
The local authority pension schemes would act as a governance board to the super pools and ensure investment performance. The LPFA has reported interest from local authorities.
