Momentum develops for London CIV

Momentum has developed for a common investment vehicle (CIV) among London borough pension funds according to both the speakers and the audience views at a seminar on the future of the London borough pension schemes.

Twenty eight out of thirty three London boroughs are fully engaged in the formation of the CIV and have agreed to pay £25,000 each for the cost of advisers to the project. The CIV will be voluntary, with London boroughs deciding which assets classes they want to invest in and how much. Participating authorities will be shareholders in the CIV operator, with investment decisions taken by an investment committee and overseen and approved by a committee of representatives from participating authorities. The CIV will initially employ a small number of administrative staff, but could build its own in-house investment team over time, as it gathers assets.

At the seminar, the initial investments for the CIV were considered. Investing passively in mainstream assets was seen as an easy win, but some London boroughs said that they could already do this at low-cost. Alternative assets were seen as attractive, as the combined fund could be large enough to tap into the illiquidity premium in areas such as infrastructure, which individual London borough pension funds may lack the scale to invest in.

London councils director for funding, performance and procurement, Hugh Grover, explained that the CIV had been developed in order to meet the political impetus for cost efficiencies in the local government pension schemes (LGPS) in the face of cuts to local authority budgets. Grover said voluntary initiatives such as the CIV are the only way to deliver results before the May 2015 general election, because there will not be time for primary legislation to be passed.

Grover said the background to the development of the CIV involved a proposal for a London-wide scheme merger, put forward by the London Pensions Fund Authority (LPFA). “The paper put forward a merger of 33 funds in order to create a fund large enough to invest in illiquid assets such as infrastructure. It was not entirely well-received, but it was felt that it could not be ignored, so we have been thinking about alternative approaches since,” he commented. The final proposals for reforming the LGPS are expected soon. While it remains to be seen if the CIV becomes a reality, over 70% of the audience at the seminar saw it as least as good as other options, such as framework agreements or shared resourcing.

London boroughs’ CIV could save costs, but is unlikely to produce higher returns
A majority of pension funds and asset managers believe that a common investment vehicle for London borough pension funds will save costs, but relatively few think it could improve gross returns.

At the Future of London Borough Pension Schemes seminar on April 9th, 75% of delegates, a mix of London borough pension funds, asset managers and service providers, said that the London Borough common investment vehicle (CIV) will save costs. This finding had increased slightly after presentations and debate on the initiative; earlier, 71% had said it would save costs.

But when asked if the CIV would improve gross investment returns, only 15% said that it would at the end of the seminar, down from 20% at the start of the meeting. Those disagreeing that the CIV could improve gross returns rose from 56% to 65%. Commenting on the audience voting results, independent investment adviser and seminar Chairman Eric Lambert said: “The main rationale of the CIV initiative is to save costs so it is not surprising that most delegates think it can do this, although it is interesting that the majority increased slightly after discussions on the CIV. But it would be unrealistic to expect the CIV to produce higher returns and most delegates understand this.”

Lambert said that there could be savings on asset management costs from London boroughs pooling funds, as scale reduces fees. He added: “Greater scale will reduce fees and lead to better net returns for passive equities, but beyond this, with active mandates and alternative assets, it is a huge leap of faith to expect better returns. There may be some cost savings from increased scale, but this is less certain and the CIV would have to find the best-of-breed managers which is difficult to do consistently over time.”

Governance would be another huge issue for a CIV approach among London borough pension funds, as it is for existing pension funds using this type of investment approach, such as the railways’ pension funds. Lambert commented: “The London borough’s CIV initiative could play a part in achieving the funds’ objectives of repairing funding deficits, saving costs, increasing returns and increasing investment flexibility, but there are significant challenges which should not be underestimated. In my own view, it is an interesting and worthwhile initiative for the London boroughs to undertake, particularly given the feeling that they have to do something before it is done to them which may also have implications for other LGPS funds outside London.”

Delegates split on higher infrastructure allocations
According to audience voting delegates at the seminar were evenly divided on whether the CIV could increase investment in infrastructure. 41% said that the CIV initiative would increase infrastructure investment, while 39% disagreed. This result was produced at the end of the meeting; at the start, 38% expected to see more infrastructure investment with the CIV, while 46% did not, so there was relatively little movement following an afternoon of debate and discussion.

Some supporters of the CIV see it as a way for London borough pension funds to pool funds and, through creating a sufficiently large pool of assets, to develop the critical mass to invest in infrastructure projects beyond the reach of individual London borough funds. One view point expressed at the event was that the CIV’s main purpose would be to increase investment in alternative assets, including infrastructure, as most LGPS funds can invest in mainstream asset classes already at competitive fee levels.

However, others felt that infrastructure investing is being pushed by the government, as a way of filling a gap caused by reduced government spending and are wary of pension funds being used as a source of finance in this way.