The ACCESS and Brunel Local Government Pension Scheme (LGPS) pools could be forced to merge with other pools after the government rejected their plans to comply with the chancellor’s “megafunds” objective.
The Department for Work and Pensions and the Ministry for Housing, Communities and Local Government have been meeting with each of the eight pools to discuss the responses to the government’s ‘Fit for the future’ consultation.
Each pool was required to outline how it will pool all remaining assets by March next year, as well as establishing internal strategic advice capabilities. All pools are also required to have an internal investment unit regulated by the Financial Conduct Authority (FCA).
The departments wrote to each pool this week informing them of the decision.
ACCESS – which has already pooled £50bn from its 11 partner funds – criticised the government’s decision and warned that a merger would incur significant additional costs.
It also criticised the government for failing to put forward its own proposal or cost mitigation plan.
In a statement, the pool said a merger with either Local Pensions Partnership or Border to Coast Pension Partnership would incur estimated transition costs of between 28 and 36 basis points, based on the value of active listed assets already pooled.
This equated to approximately £100m, ACCESS said.
“The costs of merging [are] unnecessary expenditure of tens of millions of pounds and a financial burden on our scheme members which could alternatively be used to invest in UK productive finance initiatives.”
ACCESS statement
Merger would create ‘unnecessary expenditure’
“ACCESS notes with concern that the government’s rejection of our proposal attempts to downplay significant cost considerations – without supplying its own analysis or counter-factual evidence – nor proposing a framework for how costs will be compensated in the event of undesirable pool or fund-level mergers,” the pool stated.
“After a lengthy review of the options, ACCESS established that the costs of merging far exceeded our proposed built model – unnecessary expenditure of tens of millions of pounds and a financial burden on our scheme members which could alternatively be used to invest in UK productive finance initiatives.”
It added that “all avenues are being explored”.
The Pensions and Lifetime Savings Association previously urged the government not to overlook the substantial progress already made on pooling, and to ensure that future changes are made “in a pragmatic way that is not destructive of value nor incurs unnecessary investment losses or costs”.
ACCESS has been working to establish its own regulated asset management function to comply with the government’s “megafunds” plan for the LGPS pools.
It has been active in appointing private markets managers over the past 18 months, setting up strategies to pool more than £2bn in asset classes, including affordable housing, impact real estate and direct lending. Last month, ACCESS appointed two private equity managers to a multi-year mandate worth up to £12bn.
It is unclear how or whether these arrangements will continue if a merger goes ahead.
Brunel ‘determined to ensure success continues’
Meanwhile, the Brunel Pension Partnership said in a separate statement that it would consider its response to the government’s decision and consult with its 10 partner funds.
It highlighted its progress on pooling assets as well as its leadership on responsible investment issues and allocation to UK impact investments.
“Across these criteria, Brunel has been a pooling success, and we are determined to ensure that success continues,” the pool stated.
“It is crucial that any structural changes enable this momentum to continue rather than be delayed.”
Matthew Trebilcock, Gloucestershire Pension Fund
Laura Chappell, chief executive officer at Brunel, said the pool would “continue to work with the government and our partner funds to ensure the best possible future for our pool, its funds, and their members”.
Matthew Trebilcock, head of pensions at Gloucestershire Pension Fund, one of Brunel’s partner funds, added: “Our partnership is built on a shared vision and shared priorities. We coordinate very closely to achieve our goals, and it is crucial that any structural changes enable this momentum to continue rather than be delayed.”
As well as pooling £36bn from 10 funds, Brunel has participated in several international sustainability initiatives and was one of a select group of institutions chosen to help develop the National Wealth Fund.
The government’s response
A government spokesperson said: “This government is determined to drive growth through our Plan for Change, including by taking advantage of scale and consolidation in our pensions system to unlock more investment, leading by example in the public sector.
“By 2040 the Local Government Pension Scheme is projected to reach £1trn in size – we must ensure the scheme is fit for the future. We have a duty to ensure every penny of members’ hard-earned money is well invested, and that the full scope of benefits the LGPS’s extraordinary scale are being harnessed and maximised.
“We will continue to engage closely with administering authorities and pools on how they will meet this ask.”
