You can take Toby Nangle out of Threadneedle but you can’t take funds out of the man.
In contemplating the Chancellor’s express ambition to get the £360 431 bn into a single pot under the proxy-management of the Treasury, Toby starts with one proposition
The whole thing looks crazy-complicated to operate, with over 18,000 separate employers contributing different amounts depending on the demographics of their workforce, funding level, etc.
Each administering authority has a committee of elected councillors, who set and oversee strategic asset allocation decisions, pick their own fund managers, investment consultants, actuaries, auditors, lawyers etc.
Here’s a snapshot of Cambridgeshire County Council Pension Fund’s external partner list from their draft annual report:
Earlier in the week , the FT’s Lex column had been pretty blunt about this
Councils are in deep financial trouble across much of Britain. Thankfully, their pension funds are not. Nonetheless, they are fragmented and subscale. Chancellor Rachel Reeves thinks that pooling their resources would help fire up the UK economy.
She’s right. Bulking up should allow the funds to invest in a wider range of UK assets, while cutting costs and delivering better returns. Proponents for consolidation want to emulate the success of the Canadian model, which combines scale, geographic spread and extensive asset-class diversification.
From which you’d expect him to agree with calls to consolidation.
But Toby ends with a warning
We’re not suggesting that an amalgamation of administrative authority assets is something just around the corner. But if it did happen — and management was moved in-house along Canadian-style lines — the impact would be huge. Huge as a source of funds for potential strategic infrastructure projects, for sure. But also a huge headache for struggling UK asset managers.
Anyone who has been to an LGPS conference (and there are many) will be amazed by the preponderance of financial service salespeople to LGPS delegates. LGPS is propping up UK asset managers and it is because the likes of Cambridge CC dishes out the best part of 30 contracts to manage its money. Multiply that by 86 and you can see that there is a constant opportunity for new business as asset managers , advisers and other “partners” play pass the parcel with mandates.
This really is wasteful and cannot be justified under any economic yardstick – unless you consider the preservation of the diversity of fund managers – an end in itself.
Toby Nangle is no fool, his heritage is in the funds industry, his future is as a commentator. The FT needs to be very wary not to bite the hands that feeds, it is good that it gives space to Chris Sier and Toby Nangle.
The harsh reality for the IA
The Investment Association is in an awkward place (and Toby knows it). A system where mandates were dished out by a single procurement agency for LGPS is a threat to the UK funds industry (and the LGPS conference industry too).
The bigger picture for the funds industry looks like this
Other than “third party insurance”, aka open architecture platforms used by DC, opportunities for “growth” managers are pretty small. The Corporate DB schemes (the left hand box) is all about bonds with little more than a quarter of assets invested to grow the fund (not match the liabilities). Insurance companies buy bonds and some infrastructure, while most corporate fund management revolves around cash.
LGPS swerved LDI and has growth budgets in excess of 50% of assets. Not only is LGPS a golden goose for the funds industry, but it’s one of the few geese in town. Consolidation looks a threat to the goose, snatching defeat from the jaws of victory.
So we can only imagine the lobby from the Investment Association, the PLSA, the ABI and all the smaller trade associations that lobbies for and relies on diversity of fund managers. Because the threat to many fund managers from consolidation is existential.
My personal view is that our funds industry needs to look beyond the UK to get growth and do more to export expertise to overseas markets. As I write this , I am listening to Gregg McClymont talking about pension funds “nation -building” in Australia. Gregg works for the Australian Super’s captive illiquids manager IFS, busy managing assets for UK pension funds as well as buying and managing assets for Supers.
Which begs the question – how willing is the UK Government to get pension funds investing into productive finance? You can get there but there will be casualties. Toby Nangle knows that,and the Investment Association knows it very well.
Will the Government have the courage of its conviction?
