Investment

U.K. pension pools gaining critical mass, adding investment choices

LGPS pool portfolios that started out heavily tilted toward public equities are now looking for more diversification as more assets are transferred from partner funds, consultants said.

In March, Border to Coast Pensions Partnership launched a £1.4 billion internally managed fund that invests in listed securities exposed to alternative assets to give partner funds exposure to a diversified portfolio in sectors such as renewable energy, digital infrastructure, specialist health care, real estate and private equity.

An increasing shift by LGPS pools to private from public assets in recent years “is a really important trend driven by really valid investment rationale: diversification and additional return to earn by taking more risks,” said Mr. Pearson of Hymans Robertson.

Private markets “are where our clients want to invest,” said Jason Fletcher, chief investment officer at London CIV. The pool has set up six new funds in the past six months, including ones for renewable infrastructure and private debt, where interest has outstripped expectations, Mr. Fletcher said.

While every LGPS fund now has private market exposure, “it is not as clear cut as it was 10 years ago. Price and prospective returns have come down. It is still a fairly robust opportunity, (but) all other things being equal, competition will increase” for suitable investments, Mr. Pearson said.

For Border to Coast, the private markets program designed to give partner LGPS funds more investment options, including co-investments, “is a key part of our offering,” said Mark Lyon, head of internal management. It is now looking for fund managers to invest £4 billion in a second round of private markets commitments that will bring the program to nearly £10 billion. The emphasis, Mr. Lyon said, is on long-term partnerships with managers, lower fees through scale, early engagement and co-investments. The process will also focus on how managers incorporate ESG and responsible investment considerations into their investment process, he said.

For Northern LGPS, “the vast majority of the benefits of pooling” are in alternative assets with potential for further economies of scale and combined resources to make increasingly direct investments in infrastructure and private equity, its 2021 annual report said. GLIL, its direct infrastructure platform launched last year, now has committed capital of £3.6 billion, including £50 million from the £24 billion defined contribution multiemployer plan National Employment Savings Trust, London. GLIL’s infrastructure portfolio includes renewable energy production, energy transition infrastructure, schools, hospitals, trains, water and ports.

Most of the eight LGPS pools “are well into the second phase of consolidation, which is resulting in the deepening of relationships with managers on their roster,” said Gavin Lewis, managing director and head of U.K. local government pension schemes at BlackRock Inc. in London.

“We are also beginning to see an increasing number of these pools moving into a third phase, adding value to their partner funds,” Mr. Lewis said. “When appointing mandates, pools are placing greater importance on the value managers can add by negotiating attractive fees in return for solution mandates, access to unique insights and a reduction in operational complexity.”


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