Waking the sleeping giant

The neglect of a drooping pot plant is something Sir Merrick Cockell is apologetic about, but it’s a clear sign that here is someone with rather more pressing concerns than tending to office-base flora.

A matter of hours after being announced as the new chairman of the £4.8 billion (€6.6 billion; $7.5 billion) London Pensions Fund Authority (LPFA) – the largest Local Government Pension Scheme (LGPS) provider in London – Cockell is meeting with Infrastructure Investor at his organisation’s headquarters in Union Street, home also to the London Fire Brigade.

The former deputy chairman of the LPFA has been chairman in an acting capacity since the recent departure of private equity luminary Edi Truell to a new pension and investment advisory post created by London Mayor Boris Johnson. Cockell was once the leader of the Royal Borough of Kensington and Chelsea Council and chairman of the Local Government Association.

Moreover, he has been making waves – challenging the UK’s individually-small 89 pension funds administering the LGPS around the country to join forces and arouse a sleeping giant from its slumber. As a local government representative on the board of the LPFA, Cockell had been able to form his thoughts on how pooling multiple funds’ resources could create something more efficient and powerful.

“I could see the potential inherent in having 89 funds in a scheme with £180 billion of investment value. It was as big as [Singapore sovereign wealth fund] GIC, but you wouldn’t have known it. The LGPS had no personality and no recognition that a large amount was being invested but in a way that was not competitive with, for example, the Canadian pensions.”

POLITICALLY CHARGED

At Kensington and Chelsea, where Cockell was leader of the Council for 13 years from 2000 to 2013 (and was knighted for services to local government in 2010), he saw pensions go from being effectively absent from the day-to-day agenda to high up on the priority list as council revenues were increasingly being used to prop up funds with growing deficits. “There was increasing taxpayer awareness and it became a politically charged issue. People were asking why this additional support for pensions was needed,” says Cockell.

This prompted him to consider how local government might work better together to maximise efficiency and performance. He discovered that there was little awareness of what was being invested in and not invested in. As part of this research, he discovered that the trend for infrastructure investment – which was being readily identified by other pension funds around the world as a great match for liabilities – was passing over the heads of UK pensions.

“I remember going to a National Association of Pension Funds (NAPF) meeting and asking how much we were investing in infrastructure,” he recalls. “And the answer was materially less than 2 percent. I wondered why and my interest grew in the idea of achieving scale and allowing our pensions to flex their muscles when it came to investment.”

Cockell has since been influential in the forming of two partnerships that he would like to see as the basis for more widespread cooperation across the LGPS. The first of these was a £10 billion pooling of resources between the LPFA and Lancashire County Pension Fund in December last year, which has since been named the Lancashire and London Pensions Partnership (LLPP). The second, announced just a month later, was an agreement between the LPFA and Greater Manchester Pension Fund (GMPF) to deploy up to £500 million (£250 million each) in infrastructure investment.

SHEER COMPLEXITY

Asked why such partnerships had not been formed before, Cockell points to the sheer complexity of doing so – and the need for something to come along and prompt people to take action. In this case, the trigger was the financial crisis and subsequent recession.

“I led Kensington and Chelsea when we joined with Westminster City Council and Hammersmith and Fulham Council for the provision of certain services, and people said ‘this is great, why hasn’t it been done before?’ The reason why is that you need a crisis. It’s difficult to do, so you need an incentive – and the incentive was the money tap being turned off because of the recession,” says Cockell.

In a statement announcing his chairmanship, Cockell referenced the squeeze that councils are now under from central government and the pressure to reform and make the money go further. In it, he said: “The Chancellor’s Emergency Budget [in July] made it clear that funds need to change or have it forced upon them. Only through collaboration can we meet the desired outcomes and results needed to take the LGPS out of deficit and keep our future in our hands.”

He says that the two partnerships referred to earlier were the result of commitment and good relationships. “We got on very well with Lancashire and that was the basis for it,” he says. “The teams liked each other and there was a common will. But it’s very intensive. You’re running pension funds and, at the same time, you’re creating these partnership vehicles.”

‘TEST CASE’

Keen to encourage other funds to join, the LLPP partnership has the aim of growing to £40 billion. Cockell recognises that this kind of financial firepower merits a highly skilled, knowledgeable in-house team – and putting one together is also part of the intensive work that’s required. “If you’re going up to £40 billion, you need a good chief investment officer (CIO) and investment teams that understand infrastructure and other asset classes,” he notes. “You want to get away from paying advisers.”

He also mentions the need to obtain approval from UK financial regulator, the Financial Conduct Authority (FCA), which can be both time-consuming and costly. “All 89 funds can’t do this,” says Cockell. “It takes real drive and they don’t have the capacity. But we’re creating a model that others can join. As the test case, we can make the model more familiar to the FCA and then we can run the administration and the investments.”

One model for UK pension investment that is already up and running, and also going through a process of FCA approval so it can make its own investments, is the Pensions Infrastructure Platform (PIP). An NAPF initiative, the LPFA was reported to have signed up to it in early 2013 but then pulled out around a year later.

Explaining the decision, Cockell says: “We had high expectations but for us it didn’t work due to the cost structures and delay in investing in things. We preferred the simpler model we devised with Greater Manchester which was very transparent. We each put in £250 million with a view to making joint decisions on infrastructure projects and others could well come in – I could see it growing from half a billion to a few billion.”

Cockell is equally as complementary about Greater Manchester as Lancashire. “It’s one of the largest LGPS funds, very ambitious and with a great track record that includes some interesting direct investments. We also get on well and there is a mutual understanding.”

‘NICE SYMMETRY’

He adds that forming partnerships with pensions in different parts of the country brings advantages. “There’s a nice symmetry to it. Some people say ‘why form these relationships a long way away from London, in the North? I think it makes sense to do this across the country, and Lancashire and Greater Manchester cover major cities and conurbations. Besides which, it’s not so much the geography that matters as a shared approach. We want other big funds behind us because we want to get to £40 billion with some haste and we won’t get there with only very small funds.”

Asked about strategy, it is clear that the idea is to move towards direct investing in big UK projects. “We will have large amounts under management and we will use fewer fund managers,” says Cockell. “We’re not saying that we’ll do only direct investment in areas like infrastructure, housing and equities – it has to be a balanced approach. But when we have scale and in-house expertise, we will look at the major projects that are coming forward and see what the opportunities are.”

He goes on to mention High-Speed Two (HS2), the high-speed rail link between London and the North, as a project of possible interest as well as Crossrail 2, a proposed new rail route in south-east England. Mention of the latter is perhaps not surprising since Cockell was in July appointed as chairman of the Crossrail 2 Growth Commission, which will look at how the project may boost economic growth.

Cockell goes on to make the point that LPFA is already demonstrating its determination to be a “buy and hold” investor – initially through its equities portfolio, with the organisation seeking to invest in 25 stocks on a long-term basis.

He also says the LPFA is unafraid of construction risk, as evidenced through its provision of 85 percent of the financing for the Pontoon Dock housing project in East London, which was announced in September last year. “We are prepared to look at the difficulties of construction risk, whereas in the past we would have said that’s not our area. We are dipping our toes into that with Pontoon Dock and that’s a good model for the future, when we will do larger projects.”

BALANCING CAUTION AND RISK

Cockell expands on the theme of risk, given that it’s something conservatively minded pensions have generally struggled to come to terms with. “People are cautious about risk and rightly so. That’s why you need the scale and in-house knowledge to understand risk. To get the returns we need, we can’t invest passively and accept the returns that you get from the most cautious investments; we have to balance prudence and caution with the need take more risks and get higher returns.”

Recent years have seen overseas institutional investors and sovereign wealth funds – from Canada, Australia, the Middle East and Asia in particular – taking an increasing interest in UK infrastructure assets. Rather than competing with them head-on in what Cockell acknowledges is already a competitive environment, he believes that the market is crying out for local partners with local knowledge.

“Some of the larger LGPS funds see our role as helping others by being local, and the overseas investors say to us ‘that’s absolutely right, that’s we want’. Indeed, they want not just local UK investors but those that will represent areas within the UK – and, of course, we can provide that through the likes of Greater Manchester. No one else can offer what we can, and we want to be getting into projects right at the beginning – not as an after-thought.”

It sounds like Cockell is raring to go, but he has no specific time frame in mind to get the current £10 billion LLPP partnership up to the planned £40 billion. “We’re not in a race to get to £40 billon come what may,” he insists. “But the timescale is faster than I would have thought six months ago.”

He adds: “There may have been a time when we thought we could do the Lancashire partnership, allow it to bed down for a few years and then do something else sometime in the future. That’s now unrealistic. We have to take it to others now, and those conversations are happening.”

So, for those waiting to see local pensions finally punching their weight in helping the UK to deliver its infrastructure ambitions, it’s a case of ‘watch this space’.