The benefits of external investments: UK’s pooled fund backs outsourcing

While other LGPS pools in the UK have appointed CIOs, risk officers and internal teams, the £56 billion ($121 billion) ACCESS pool has outsourced every aspect of investment decision making and will remain externally managed. It’s now looking for managers as it moves on the pooling of illiquid assets including private equity, private debt, infrastructure and real estate.

ACCESS pool, one of the United Kingdom’s eight Local Government Pension Scheme pools, representing 11 local authority schemes in the east of England, is under the radar compared to better-known sister pools like Border to Coast, Brunel Pension Partnership or LGPS Central. Yet with £56 billion in assets under management and representing 3,400 local authority employers, it is one of the largest LGPS asset pools.

Like others, ACCESS was tasked with setting up operational and investment capacity to allow client local authority schemes, still responsible for their strategic asset allocation, to invest together creating economies of scale, cutting costs and broadening their ability to access alternative investments.

However, unlike most of its peers, ACCESS has forgone building an internal investment capability, mandating instead to a pool operator and wholly outsourcing all investment to managers. Out of the eight LGPS pools, five are authorised and regulated by the Financial Conduct Authority.

Progress

To date ACCESS has pooled £35 billion of its members’ assets via two passive mandates (£11 billion) run by UBS and a selection of active, sub-funds (£24 billion) offering access to equities, fixed income and diversified growth.

Using the administrative service provider Link Fund Solutions, responsible for the overall management of the pool including the creation of investment sub-funds and the appointment of investment managers, ACCESS recently added to its sub fund selection, mandating to BlackRock, Macquarie, Fidelity and M&G and bringing total pooled assets of member funds to around 59 per cent. In comparison, Brunel Pension Partnership now runs around 80 per cent of total member assets.

Next up is a review of responsible investment guidelines and the first procurement for alternative assets, explains Councillor Mark Kemp-Gee, chair of ACCESS’ governing body, the joint committee. Minerva has been appointed as part of the responsible investments review, providing advice on guidelines and implementing these in a pooling environment.

Later this year a further procurement will take place for advice on future RI reporting requirements to provide transparency to stakeholders, monitor adherence to guidelines and inform discussion on ESG/RI matters.

“Our key areas of focus have been both the joint procurement of UBS as the manager of passive listed assets and the process for procuring Link Fund Solutions as operator for the ACCESS Authorised Contractual Scheme (ACS) which houses active listed asset sub-funds,” says Kemp-Gee, adding that ACCESS has benefited from the full engagement of all 11 authorities throughout the challenges of the pooling process.

ACCESS has appointed consultancy MJ Hudson as implementation adviser for the pooling of illiquid assets including private equity, private debt, infrastructure and real estate.

“MJ Hudson will provide support to the pool in selecting individual investment opportunities and investment managers to build portfolios in a range of illiquid assets,” says Kemp-Gee.

In a measure of the benefits of pooling, as of 31 March 2021, savings totalled £42.3 million in a trajectory set to continue with the establishment of non-listed mandates within the pool.

“The creation of the pool has enabled the ACCESS authorities to leverage their collective size,” concludes Kemp-Gee. “Savings have been generated as a result of reduced investment management fees.”

staying externally managed

ACCESS has no plans to run any assets internally. At the start of the pooling journey, all member funds were unanimous that they would outsource all investment to asset managers, he says.

“The ACCESS authorities have several similarities in how they approached investment. These include the exclusive use of externally appointed investment managers and an absence of internally managed mandates. This approach remains unchanged as pooling has progressed.”

While other pools have appointed chief investment officers and risk officers, ACCESS’s internal team comprises just five full-time staff sitting in the ACCESS support unit providing program and contract management support. Elsewhere, five part-time staff provide technical leads, drawn from ACCESS member funds. Neither the joint committee nor the support unit have FCA authority. Strategic oversight and scrutiny responsibilities remain with the individual pension funds as does all decision-making not only on their individual asset allocation, but on the timing of transfers of assets into the pool.

In contrast, the investment team at Border to Coast numbers around 50 people today managing some £30 billion in active equity and fixed income. Recruitment and building internal investment capacity at Midlands-based LGPS Central includes hiring investment team members from the region’s graduates in a bid to build investment expertise outside London’s dominance. To date, three of the eight pools have established internal investment capability in passive equities and government bonds.