Brunel Pension pool sets strategy

Structure and strategy continue to take shape at the UK’s Brunel Pension Partnership Ltd.

BPP is the new manager for the pooled assets of 10 of the UK’s local government pension funds. It will manage about £28 billion ($37 billion) in 22 different portfolios from April next year.

The BPP is one of eight asset pools formed out of 89 local government pension funds as a result of the UK Government’s July 2015 budget. The aim is lower investment management costs and more effective management of assets, along with savings through the pools’ collective buying power.

The 10 funds combined in the BPP pool will continue to make their own investment decisions and allocate their own assets; however, the BPP will select the investment managers, execute the investment decisions and monitor performance.

Current mandates among the 10 number well over 100, with about 90 fund managers. Getting down to 22 portfolios will reduce the number of managers to about 60. The pool will save an estimated £16 million ($21 million) annually and have the potential to increase that to £70 million ($91 million) a year over time.

“We agreed to the specifications of the portfolios over a year ago with our clients, the underlying pension funds, and we are revisiting these now to ensure that any changes to investment strategy statements are incorporated and we can finalise the portfolios – essentially the BPP Ltd prospectus,” explains BPP chief executive Dawn Turner, formerly chief pensions officer at the Environment Agency Pension Fund, one of the bigger funds in the pool.

Mark Mansley, former chief investment officer at the EAPF, is BPP’s CIO. Investments will not be managed internally at the start but this is likely to change going forward, Turner says.

“We are aware of the opportunities of some internal management and as we establish ourselves, we will look at the business case for [this],” she explains. “Moving to any internal management will be a shareholder decision. We will, though, from the start, have a much more direct approach for our private-market portfolios, moving away from funds of funds.”

Setting strategy, with emphasis on responsible investment

Investment strategy at the pool will have a strong focus on responsible investment and stewardship, led by the best-practice standards well embedded at the EAPF.

Responsible investment, “a key investment principle”, will apply across all the assets within the pool, Turner says, especially responsible stewardship in terms of voting and engagement. Infrastructure will be an important asset class, as BPP clients will be better able to access such opportunities through collaboration.

Establishing the pool’s investment principles has provided the bedrock to strategy.

“We had to ensure that we all agreed to the investment principles,” Turner says. “This was fundamental and our starting point. [They were agreed upon in] May 2016.”

Another foundation for strategy was the creation of portfolios that could deliver the outcomes required from 10 different investment strategies in “a small enough number of portfolios to gain economies of scale, manage risk and create opportunity for improved performance”, TURNER explains.

She adds: “We had to ensure that we had our eyes wide open to the cost of transition and the level of fee savings possible.”

More recent steps include legally establishing BPP Ltd and gaining 10 administering authorities, along with settling on the shareholder agreement and service agreement.

It has, she says, been a process defined by “open conversation, the commitment to working in equal partnership, transparent communication and the professionalism of officers and committee members. The challenge would have been so much more without these good behaviours and good attitudes.”

Consultants advise on costs

BPP has used 12 strategic partners and consultants so far. Consultancy bfinance was tasked with providing independent advice on the proposed portfolios, fee levels and projected savings, as well as reviewing the portfolio specifications. It has also helped build a structure to maximise efficiency while preserving the independence of the respective schemes.

“Analysis determined the potential fee savings that could realistically be expected in the relevant investment sectors as a result of asset aggregation, as well as prospective transition costs and other elements,” bfinance stated.

BlackRock has also worked on analysing the potential transaction costs the pool may face. Its work was based on assumptions about manager selection and how estimated costs changed given different manager choices.

Other advisers include Russell Investments, which has helped member funds determine how to optimise portfolios to ensure efficient management, and how to handle the complexities of using multiple managers.

Between now and next April, BPP will continue its transition plan, focused on revisiting its 10 funds’ strategic investment strategies, finalising the portfolios and continuing to engage with investment consultants and fund managers. Next steps also include staff recruitment, completing Financial Conduct Authority approval for BPP Ltd, and working with new administrator and custodian State Street.