February 17, 2013 3:31 am

Shake-up for London pensions

London City Hall©Charlie Bibby

City Hall, London: the pooled pension plan has the backing of the London mayor

The new chairman of the London Pensions Fund Authority, Edmund Truell, is to shake up London’s local authority pension funds by merging them into a single scheme and channel more investment into the capital’s infrastructure projects.

“A pooled pension fund, with assets of approximately £40bn, will reduce costs, including investment management charges, and make huge savings in administration,” Mr Truell said in his first interview in the job. He started at the LPFA last month.

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The pan-London fund – which has the backing of Boris Johnson, London mayor and Eric Pickles, the UK communities secretary – will pool the assets of 32 boroughs, the LPFA, which is one of the country’s largest local authority pension schemes, and Transport for London. The merger comes at a time when many funds are struggling with deficits.

Public pension funds “have not been monitoring investment managers well and have not kept an eye on the asset classes their money is in”, Mr Truell said. They have also underestimated their liabilities and are facing big deficits, he added. The LPFA has about £5.5bn of liabilities and £4.5bn of assets, leaving it with a £1bn deficit.

Mr Truell, a private equity entrepreneur and former chief and founder of pension fund buyout house Pension Insurance Corporation, estimated that if such a scheme were rolled out across all the UK’s local authority defined benefit schemes savings of about £17bn would be made.

Grouping public pension funds together to gain economies of scale, improve returns for members, and better manage scheme assets and liabilities is well established in the Netherlands and Canada.

But the UK local authority pension scheme landscape is still fragmented with many small funds resistant to losing their independence.

Amin Rajan, chief executive of Create, a consultancy, warned: “Consolidation is not a panacea and while it reduces costs it does not guarantee better returns. Some of the biggest plans worldwide have the worst deficits.”

He said the merger should be judged by how it will deliver better investment capability.

Mr Truell was reluctant to give a time span for completion of the merger. “It is a matter for individual borough funds,” he said. There are also “vested interests [to overcome] such as actuaries and consultants who charge huge fees”.

There are often good reasons to bring pension funds together where they have a common employer as savings can be made with one set of trustees and advisers, said Bob Scott, senior partner at Lane, Clark & Peacock, the actuarial consultants. But with multiple employers mergers can throw up challenges in terms of liabilities and cross-subsidies, he added.

Mr Truell also plans to change investment strategy, starting with the LPFA in a move away from UK gilts, which he believes no longer match pension scheme profiles. He will instead invest more in infrastructure.

“I have told the LPFA you have to sell gilts or you will be bankrupt,” he said. “If we free up this capital we can allocate a significant sum to housing and infrastructure in London.”

Over the next two years the LPFA plans to invest up to £500m into housing and infrastructure, in addition to £200m already invested, and to co-invest to build a larger pool of money. Some London borough schemes such as Kensington and Chelsea have no exposure to the asset class.

“We want to build for long-term rent and shared ownership and will do this through builders, housing associations and the Greater London Authority,” Mr Truell said. The aim is to gain real returns of 4-6 per cent over the long term from the investment.

Acquiring land, largely in east London, such as parts of the Olympic legacy site, will be helped by a partnership with the GLA, which owns land in the area.

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