Over the last eight years the United Kingdom’s 86 local authority pension schemes (LGPS) have pooled their assets into eight mega pools, most going under the umbrella of newly created FCA-regulated asset managers, re-tendering their portfolios, moving staff to shared offices and nurturing new cultures into life. Some have taken a different approach, amongst which sits the £18 billion West Yorkshire Pension Fund for local government beneficiaries in the north of England.
West Yorkshire has pooled its private equity and infrastructure allocations into Northern LGPS, the pool for neighbouring funds £29.3 billion Great Manchester and £10.8 billion Merseyside Pension Fund, which together make up three of the largest pension funds in the country. Like other pools, the process has generated efficiencies by sharing resources, and according to annual CEM performance and cost benchmarking, Northern LGPS’ costs are materially below the global peer group average.
But when it comes to the rest of West Yorkshire’s portfolio, apart from two pool mandates in excess of £10 billion each, the pension fund continues to invest the bulk of its assets via its own 20-person in-house team based from its Bradford office. Two hundred miles north of policy makers in London, cranking up pressure on the pace and scale of pooling as it seeks to get the LGPS to invest at scale in the UK economy.
The government has just closed a consultation on pooling’s progress and processes that will shine a spotlight on Northern LGPS and West Yorkshire’s approach acknowledges Leandros Kalisperas, West Yorkshire’s CIO, charged with defending West Yorkshire’s reluctance to pool.
“There must be an element of people thinking, why should Northern be able to withstand the pressures that other pools have had to feel. But within Northern LGPS, we have a set of low cost listed mandates as well as direct and allocation expertise across private markets that is proving successful.”
Kalisperas argues that West Yorkshire’s proud heritage of internal investment management aligns with the government’s objectives to foster in house investment management within the pools, and a levelling up agenda designed to end disparity in wealth and opportunity in the UK by creating financial services jobs outside London.
“The government hasn’t created pooling just to be a middleman for trillion-dollar commercial asset managers,” he says. “If internal investment management is an important part of efficiency and levelling up and creating centres of excellence outside London, we are absolutely playing our part.”
Nor does he believe the current structure will impede West Yorkshire’s ability to access alternative opportunities, a portfolio he seeks to build out. West Yorkshire invests in private markets via GLIL Infrastructure which manages infrastructure assets both for another LGPS pool as well as for Nest’s DC assets, and via a private equity collective vehicle, NPEP.
“In private equity and infrastructure, we have a solid and practical pooling structure,” he says. “The biggest challenge in the UK going forward is simply the supply of opportunities.” Stable operational assets with income are hard to find for investors like West Yorkshire with a total return perspective, able to cope with long-term returns, he says.
Resourcing a bigger team could be easier with more assets under management, but West Yorkshire has a stable team and culture that shouldn’t be thrown away lightly and should be leveraged for the wider good. Pool success depends most on alignment of strategies and the underlying approach to investment rather than of total AUM, and size alone doesn’t necessarily equate to lower costs.
“If I had to choose, I would prefer to have a stable investment culture and team, rather than just be able to throw big numbers about,” he says. In short, West Yorkshire’s strategy is no different to other sophisticated asset owners that have in house expertise and strategic external partnerships, he says.
West Yorkshire is also committed to the government’s ambition that pooling support broad UK economic growth. Kalisperas wants to both fill and build out the alternatives bucket that is currently underweight its target 5 per cent allocation. “It will likely involve some reallocating of UK listed equity to UK private equity, UK private debt and venture.” He wants the boosted allocation to focus on local impact in the region with infrastructure, affordable housing, and climate investment at the top of the list. He is also interested in tech innovation spinning out of UK universities.
Unlike the other two funds in the Northern pool which represent large cities, West Yorkshire hasn’t been able to invest as much to boost the local economy because it has been harder to generate opportunities in its more diverse set of local economies. “I suspect that developers and commercial asset managers find it easier to supply local opportunities for Merseyside’s and Great Manchester’s pension funds, but we simply have to work harder to make sure that people know we are open for business,” he reflects.
That hard work includes creating an impact structure and strategic framework that will allow West Yorkshire to consider the types of investment that will generate a return but are unlikely to hit the return target at a total portfolio level. “There must be a place for investments that have a return below our total return target, but which have an impact. If there wasn’t, bonds would almost never be in anyone’s portfolio. Someone can say I want us to do more in West Yorkshire and someone else say we aren’t grant money – both views are correct, but they are not mutually exclusive.”
Alongside governance and benchmarking systems it has involved changes to direct reporting in the investment team, and making sure that investment opportunities aren’t just seen by one team, something Kalisperas worked on in his time at USS between 2010 and 2016. “We are creating more spheres of influence within the investment team and making sure it is not just one person looking at inbound opportunities from our partners.”
Still, despite the many benefits of West Yorkshire’s investment approach he notes the fund hasn’t kept up with the expansion in the investment universe and the global market opportunity. His plans for reallocation will also focus on fixed income and credit where he says West Yorkshire remains quite narrow in its current view of investment opportunities. Emerging market debt, asset backed securities or CLOs are corners of the market the fund simply doesn’t touch. “We should try and find ways to ensure we are allocated to a broader global market opportunity set.”
Around 70 per cent of the new benchmark is in allocations that are sensitive to economic growth that include public and private equities. Twenty per cent is in fixed income and credit instruments, 5 per cent in property and 5 per cent in alternatives.
Kalisperas has only recently got his feet under the table but he already knows what he wants as his legacy. “Much as I am proud of having been appointed, I want my successor to be local and that is harder to happen if people are only looking at one part of the puzzle. I want someone from the current team to apply for the job when I leave and if they are the best candidate, to get it.”
In the meantime West Yorkshire waits for the results of the consultation to provide clarity and on whether its hybrid approach to pooling is enough to assuage government masters in London.