GC Interview With Penelope Biggs On London Pension Fund Mandate

Northern Trust is supporting London’s local government pensions funds by bringing them into a transparent tax fund, a collective investment vehicle that will pool their funds under one roof. 

The vehicle, known as the Authorized Contractual Scheme (ACS) is structured as a co-ownership arrangement. It is designed to help London boroughs to achieve economies of scale, provide a platform for cost savings, and enable access to opportunities for investment in alternative asset classes that may not have previously been easily achievable for individual funds.

Penelope Biggs, head of institutional investor group, EMEA, Northern Trust talks to Global Custodian about the launch of the vehicle.

What is the background to the ACS?

PB: In June 2013, following negotiation with Northern Trust, HMT (Her Majesty’s Treasury) and the Financial Conduct Authority it was agreed from a regulatory perspective that the ACS was going to be recognized as a vehicle. This was the first time that the U.K. ever had its own fund authorized. That’s when it was approved. Now we are launching one.

What is a tax transparent pooled fund?

PB: I think of it on two levels. On one level, when a client who is fairly tax efficient wanted to invest in the pooled vehicle before this fund was approved, sometimes the pension fund would lose its tax benefits because the authority looked at the tax status of the pooled fund and not at the tax status of the underlying client or the pension fund. The first thing that happened here, because the ACS is a tax efficient vehicle, pension funds could use the vehicle without losing the tax status or benefits that they had. That was a big step forward for the U.K. so that’s the first angle. So this structure allows pension fund to keep their good tax status. The other aspect is that because it’s a pooled structure, people like the London councils can really bring a bigger pool of assets together to get better access to different types of investments, economies of scale and to maximize efficiencies. You have your tax advantage, tax neutrality through a pooled vehicle you’ve got your economies of scale and access through a pooled vehicle.

I think of it in the sense that if you are a fairly small pension fund its really hard to invest in bonds, equities, private equity and everything you want to make your asset pool 20 or 30 times bigger. Between a club of funds you can get great diversification and for a good fee.

This gives them a platform for more and more assets to get bigger more efficient with cost effective pools. Not every council or local government will use the same pool. They may well set up their own. We have had lots of conversations with corporations and governments looking to get economies of scale. If I was a betting person I would see these gathering momentum and I would see a number of these being launched by either asset owners looking to pool or asset managers looking to use this vehicle so it’s going to work for both pensions and asset managers.

How would it work for assets managers?

PB: A big asset manager in the UK might historically want to launch a pool fund but as they are not a large company they might say well maybe I need to launch a fund in Dublin or Luxembourg – the only place you can get tax transparency. Now U.K. asset managers have their own U.K. vehicle and they don’t have to go somewhere else to launch a fund. It’s very compelling for them and our tax authorities and regulators.

What is Northern Trust’s role?

PB: I would summarize it as two parts – in the first part we’re working with the industry, particularly with government and regulators to agree to make this fund real. So there was a lot of lobbying and consulting and working to prove this was a really good thing for the U.K. and for U.K. investors. So for 18 months or so, that was our role, bringing people together and working with them. Somebody has to be custodian for the fund, they have to do all of the administration, they have to strike daily NAVs, they have to do the transfer agency for all the investments coming in and coming out.

How popular will the ACS become?

PB: It will be big for a couple of years because already there are a number of large government funds and corporate funds, which are thinking about how it could work for them. They can quickly see the benefit in the way that the asset managers can so there’ a near and medium term pipeline of people who are keen to make this happen over the next 18 months. I think some people are quick to get first mover advantage and the other asset managers want to move quickly to get ahead of their asset managements competitors or underlying pension fund business.

Other people are talking about it and we already have an asset manager who is up and running so we are ahead of the curve. Other people want to do it so it’s a question of how quickly they can catch up and if they’ve got the technology and the expertise we just need to make sure we get ahead for our clients in these early days.