A perfect cadence is the most harmonious resolution of a series of chords, the weaving together of separate notes to form a cohesive sound.
For Local Pensions Partnership Investments (LPPI) chair and classical music-lover Sally Bridgeland, it’s also the perfect metaphor for her work.
‘It’s like a pooling exercise,’ she says.
Bridgeland, who is also the first female master of the Worshipful Company of Actuaries, has created a kind of symphony herself in her assembly of asset classes and investment holdings for the LLPI.
A difficult task for some, for Bridgeland, who redesigned the investment strategy while at the helm of the £19 billion (€22 billion) BP Pension fund, it is merely fine tuning.
LPPI looks after the £12 billion (€14 billion) portfolio of the Local Pensions Partnership (LPP). The LPP is one of eight investment pools being created by the local government pension funds in England and Wales (LGPS).
The pooling, initiated by former chancellor George Osborne aims to support the LGPS by giving them the economy of scale to help negotiate lower fees with asset managers or entering asset classes that were previously too difficult to access, such as direct infrastructure.
The LPP, despite being among the smallest of the pools, has been at the forefront of the transition. Created by the London Pensions Fund Authority (LPFA), and the Lancashire County Pension fund, it was launched unofficially in 2015. LPPI became fully operational in April 2016 after receiving regulatory approval from the Financial Conduct Authority (FCA). In July, the third LGPS, the Berkshire Pension fund, decided to join the pool.
A unique approach
Bridgeland says the LPP has a unique approach to pooling. It adopts a more comprehensive view. ‘What’s different about the LPP approach to the general “let’s pool our investments” approach, is that we want to think about risk as well as liabilities.
‘We do the administration of the benefits, the investment of the assets and that risk piece that pulls that together. And, as an actuary, this passion for risk management is the thinking ahead. It’s not just thinking about how we can save money now – which you can do by pooling the investments – it’s thinking about what we might need in the future.’
However, in the end it’s going to be up to the pool members themselves to decide on the most important part of the business: investment strategy.
‘What we are doing at the LPP is not changing any of those government structures that are in place at the local level. It’s still the local pension boards and local authorities that make decisions about the investment strategy, the levels of risk they are taking. What we do is help support them in making good decisions and implementing them. So we take away all the “which fund manager shall we use” stuff – that’s delegated to LPPI.’
One of the biggest challenges – not only for the LPP but for all the pools – is getting the timing right for redesigning their illiquid portfolios. This is especially important because one of the main goals in creating the pools is to allow them to invest with as few constraints as possible in real assets.
Bridgeland says building a portfolio can take months, but people are now getting more used to the fact that you can’t just switch straight over into another kind of asset in a day.
The real challenge, however, is building the portfolio quickly while paying a good price for it. ‘What you don’t want is a balancing act between wanting to implement your asset allocation strategy as quickly as you can and not paying the wrong price.
‘Because when you pay the wrong price with illiquids, that kills you. You only do that once so you’ve got to get that number right when you sign the paper. Patience really is a virtue on that. Deciding infrastructure markets, housing or property are too expensive? Figuring out whether now is a good time to buy? These are important decisions to get right.’
In addition, as a pension fund, you require a decision-making discipline and must make every investment decision by looking at your liabilities. ‘Actually, the question should not be: “Is now a good time to buy property?” but rather: “Is now a good time to buy property given the cash flow you get from that investment vs. the cash flow you have to pay on your liabilities?”’
She adds that these kinds of strategic decisions are crucial for her. ‘It means you are framing your decisions in terms of what kind of yield you would like to get, what kind of total returns or what kind of performance vs. liabilities you might get.’
Today, these kinds of decision-making disciplines are more prevalent in the private sector. It is no coincidence then that the LPP behaves more like a private pension fund in this regard.
LPPI’s Equity Portfolio has been one of the first things it has pooled
LPPI would like to take on more LGPS clients than the three who have already committed to join. And it doesn’t close the door for the pension funds, which would only like to access a certain range of investment management services. For example, in 2015, it established an infrastructure fund together with the Greater Manchester Pension fund, which is not a part of the LPP pool.
One of the partnership’s first investments was committing £60 million (€69.7 million) towards funding the construction and operation of British renewable energy assets via Iona Capital.
What are the advantages of the LPP compared with other asset managers on the market? Bridgeland says that because of its position, it can understand the client better.
‘We want to be as professional as the best external asset managers. And to me that professionalism comes from really understanding a client. I was a consultant for 20 years and I thought I knew what understanding a client meant but I didn’t. And because the heritage of the people here is in running in-house as part of those teams, those funds get that understanding. You can tick that box in a way an external asset manager finds really difficult, because they’ve seen the cost pressures first-hand, they’ve seen the culture and really do get where that’s coming from.’
But LPPI doesn’t want to compete against established asset managers, she says. ‘I don’t think we pretend to be able to do everything ourselves because if you just end up reinventing the external asset manager, then what’s the point?’
Instead, Bridgeland wants to focus on several specialisations where LPPI might have an edge.
‘What is it that gives you an economic edge, that you’re passionate about and that you’re good at? Find that and you’ll be really valuable.’
She adds that the thing that gives LPPI the edge is always looking to reduce deficits in local authority pension funds. ‘That’s what we want to do - we can do that by reducing costs, by getting better returns, or by being tight on liability management.
‘Let’s be a not-for-profit fiduciary manager for people that we know, people like us,’ she concludes.
Because in investment, unlike in music, dissonance is never appreciated.