Investment Costs ‘Halved’ by Pooling, Public Funds Claim

UK pensions report early wins from joining forces and assets, as officials scrutinize the experimental move.

London’s pension funds have halved some asset management costs since uniting in a collective investment vehicle (CIV), the new group reported to government.

“It is inevitable that as more complex and expensive assets are added then fee savings will significantly increase.”The London CIV is expected to deliver £3 million ($4.3 million) of savings every year for the first 20 funds backing the project, CEO Hugh Grover wrote in the report. The report responds to a UK government consultation on the ambitious pooling of local government pension schemes (LGPS), the deadline for which is tomorrow.

“To date London CIV has seen fee reductions of up to 50%” during the first phase of asset pooling, Grover stated. This phase included the launch in December of a global equity mandate run by Allianz Global Investors and backed by three London pension funds.

“It should be recognized that the first phase represents relatively low cost asset classes with the majority being invested in passive asset classes,” Grover added. “It is inevitable that as more complex and expensive assets are added then fee savings will significantly increase.”

Negotiations with custodians and other service providers could add further savings, he noted.

In November, a seven-strong pool of funds based in the Midlands region reported cost savings of more than 50% after striking a deal with Legal & General Investment Management to run passive and smart beta strategies. The group now consists of eight funds and £35 billion of assets.

The London CIV expects to launch a further eight funds by the end of next month. These will include a second actively managed global equity mandate, two passive developed market equity funds, two passive UK equity funds, two passive emerging market equity funds, and a diversified growth fund. The funds will total £6.1 billion—just under quarter of the 31 London pensions’ total assets—with 20 pensions invested.

“It is anticipated that every participating [pension] will have opportunities to migrate to the CIV by March 2017,” Grover said.

In a separate response to the consultation, investment management giant BNY Mellon claimed that the LGPS should form “two or three infrastructure super pools” to ensure sufficient scale for public pensions allocating to the asset class.

“Creating infrastructure portfolios in excess of £6 billion would create even more synergies, allowing [LGPS] to access a wider range of infrastructure opportunities, and enabling them to achieve greater diversification across the portfolio,” the asset manager said.

Increasing pensions’ allocation to infrastructure is a cornerstone of the UK government’s push to pool assets, led by Chancellor George Osborne. Osborne has targeted the creation of six “British Wealth Funds” from LGPS assets.

Related: London United

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