Independent review of pension pooling project from bfinance
Investment consulting business bfinance has been appointed by the Brunel Pension Partnership, an investment pooling project, to undertake an independent review of the plans to pool the GBP23 billion in investment assets of 10 local government pension funds in the South West.
Leading the Brunel Partnership contract at bfinance is Sam Gervaise-Jones, head of client consulting for the UK and Ireland. He explains that bfinance has grown since 1999 from its headquarters in London to five other locations and serves institutional clients in 32 countries.
While it’s difficult to put a figure on how much money the firm advises on, their clients control something in the region of USD3.5 trillion in assets.
Gervaise-Jones explains that bfinance has a long history of working with local government pension schemes as some of their earliest clients were local authorities and they have worked with over 40 LGPS funds to date.
The debate over pooling pension assets in order to achieve economies of scale and improved performance has raged for some time. “Over the last few years, and led by central government, there have been concerns that local government pension funds weren’t being managed as efficiently as they could be,” he says. “There have been concerns that the lack of scale made fees and costs higher than they could be and that some didn’t have access to all the investment asset classes that they could have.”
GBP25 billion is the portfolio size that has been deemed ‘a sensible number’, to quote Gervaise-Jones, and the result has been that 89 funds have talked and coalesced into a number of pools, of which Brunel is one.
The Brunel Partnership is based on a group of funds in the south west which had previously worked together on joint procurement exercises. It was established in 2015 to explore the options for pooling the investment assets across 10 funds in the South-West, including The Environment Agency Pension Fund, and the Local Government Pension Funds of Avon, Buckinghamshire, Cornwall, Devon, Dorset, Gloucestershire, Oxfordshire, Somerset and Wiltshire.
Having worked together on other projects, it was a natural extension to continue with that collaboration, Gervaise-Jones explains.
Each new prospective pool had until July this year to put in a submission to central government on how they would get to scale and manage their investments going forward. They were also charged with making greater use of infrastructure investments.
The deadline for this process was July of this year and required a huge amount of work.
“Asset allocation decisions stay with the funds but are implemented through the Brunel Pension Partnership,” Gervaise-Jones explains. “They decided what building block portfolios they would offer, and next there will be some expectations around what sort of fee savings they would achieve and the likely costs of the new structure, matched against expectations of improvements in performance.”
Government response should be back in the Autumn, allowing them to push on with the project because, on the current timeline, this should be up and running by 2018.
It was at the stage of looking for an independent review of the investment and business case, that they ran a tender asking for proposals to help review the 23 portfolios. “Through a competitive assessment of all the consultants we were appointed to provide an independent assessment and view on whether the business case, as it stands, is pragmatic and implementable,” Gervaise-Jones explains.
“At present nothing has changed in the way the money is being managed. Each authority is managing their own investments in the same structures they had before and all the regulatory and other structure has to be put in place next and then at that point they will start looking at how they implement these 23 portfolios. We will be hoping to put forward a solution for that.”
Across the UK there are other pools all going through similar exercises, Gervaise-Jones explains. “There will be a number of similar projects down the line as people face similar issues.”
Different geographies have seen different versions of achieving scale over the years. “It has been well documented in the Netherlands,” he says. “The jury is out as to whether it has worked there. It was a different journey in the Netherlands, more focused on fiduciary management.”
However, scale will enable local government pension funds to access investment classes that are not currently available to them, specifically infrastructure and hedge funds.
“Those asset classes make more sense if you pool so you can improve diversification and risk management,” Gervaise-Jones says.
bfinance is organised along four areas: public fixed income; public equities; private markets and liquid alternatives, which includes hedge funds.
“If you look at our manager selection and search activity, we do one third equities one third fixed income and one third alternatives,” Gervaise-Jones explains. “Alternatives feature highly because, one, we’ve set up our teams to be staffed with investment experience in these areas, which is valuable when looking at the alternatives investment areas where clients have typically have been less comfortable, and two, activity levels. Some 15 years ago institutional investors had small alternative allocations, but fast forward to today where, on the whole, equities allocations have come down and alternatives up gone up, we are able to help people with alternatives because that’s where the activity has been.”
Gervaise-Jones explains that local government pension schemes have been interesting to work with because there is a strong case for investigating whether things can be done in a more efficient fashion, while always asking if it will end up with better results for pension funds.
“It’s not that bigger equals better on performance,” he says. “There are plenty of challenges, but it is an exciting time for the sector to make some positive changes to the way they run their investments.”