Ahead of Room151’s Private Markets Forum in London next week, Tim Mpofu, head of pensions and treasury at the London Borough of Haringey, talks to Aysha Gilmore about how the pension fund’s private markets allocations have evolved over recent years.
Over the last ten to fifteen years, there has been a push for the investment industry, including the Local Government Pension Scheme (LGPS), to commit to private markets.
Some of this drive is due to the perception that you can get higher returns from these assets. In more recent years, this coincided with increased calls from the government for greater private market allocations. Last year, chancellor Jeremy Hunt’s Mansion House reforms set the ambition to double LGPS investment in private equity to 10%.
In addition, the Spring Budget in March announced the requirement for funds to publicly disclose their UK equity investments, with the government potentially taking “further action” if allocations don’t increase.
The £1.8bn Haringey Pension Fund has been a long-standing investor in alternatives. It first invested in private markets pre-2010, committing to private equity with the primary objective of improving its funding position by growing its assets.
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Tim Mpofu, head of pensions and treasury, explains that since then, Haringey has increased its allocation to private markets, now accounting for approximately 12.5% to 15% of its overall investment portfolio, with its funding position improving from 70% to 113% over the last 14 years.
“In 2010, the fund was significantly underfunded but now it finds itself in a healthier funding position. There was a considerable need for growth assets within the portfolio back then, which was the primary driver to commit to private equity at that time.
“The significant improvement in funding levels has meant that the way we approach our investment strategy has changed. So, where we have been able to reduce some of our listed equity allocations we have, but we have not done so with private equity, we still think it has an important role to play within the portfolio,” Mpofu explains.
De-risking?
Haringey’s performance fits in with the broader trend of improved funding ratios across the LGPS due to the decline of the present value of their liabilities, with some funds considering de-risking and increasing their allocations to fixed income.
However, Mpofu highlights that despite “some considering de-risking”, Haringey has been diversifying its portfolio into more private markets strategies such as renewable infrastructure.
“The main driver for this is the steady income generation that you’re able to achieve with these assets, which is especially important for a fund in a healthier funding position. As we’ve experienced with the recent high levels of inflation, allocations to asset classes that provide income as well as an inflation hedge, make a lot of sense..
LGPS pension benefits are uplifted each April based on the prior year September CPI. In April 2023, the increase was 10.1%, which was followed by a further increase of 6.7% in April 2024.
“Environmental, social and governance considerations also play a key role in the fund’s asset allocation decisions, that’s why the allocation is specific to renewable infrastructure, so it can support the transition to a low carbon economy,” he adds.
Currently, the fund has committed 5% to private equity, 2.5% to infrastructure debt and 5% to renewable infrastructure. It invests in renewable infrastructure funds through both its pool, £26bn London CIV and external managers Blackrock and Copenhagen Infrastructure Partners.
Mpofu explains that Haringey appointed the two external managers to manage its renewable infrastructure mandate in 2017/2018 when the pool did not yet have a solution in place.
Haringey Pension Fund was also one of the “seed investors” in London CIV’s London Fund, which invests in infrastructure, affordable housing and regeneration projects across England’s capital.
Mpofu added that in the coming months, the fund plans to conduct a review of its private market allocations.
Pooling consolidation
Alongside pushing pension funds to invest in UK private equity, the government has also been hinting at significantly reducing the number of LGPS pools and funds, with Hunt’s Autumn Statement in 2023 announcing that by 2040 pools will have £200bn in assets under management.
In addition, last week, Room151 revealed that the UK government is putting increased pressure on the LGPS to further consolidate the management of their assets. The local government minister Simon Hoare wrote to all administering authorities to investigate the pace of pooling and explore the prospects of potential fund mergers.
Currently, there are 32 LGPS funds in London and two pension pools based in England’s capital: London CIV and London Pension Partnership.
Commenting on the potential future consolidation and what this could mean for the fund’s future allocations to private markets, Mpofu said: “My personal observation from the responses to the government’s most recent consultation, is that there doesn’t seem to be much appetite for pools to compete. However, perhaps a centres of excellence approach could result in economies of scale being achieved across the sector.
“For Haringey, being able to invest through the pool allows us to collaborate with other investors across London to be able to achieve economies of scale and have broader access to private markets investments. For example, the renewable infrastructure fund launched by the London CIV in 2021, is considered one of the more successful strategies the pool has launched just because they were able to recognise the interest and demand for the strategy from the underlying funds.”
Private market pooling
Currently, Haringey has pooled over 75% of its assets, including its passive strategies. It has also invested over 30% of its portfolio directly through the London CIV.
In the local government minister’s letter to administering authorities two weeks ago, Simon Hoare asked funds to outline how they intend to complete the pooling of listed assets ahead of the March 2025 deadline to ensure their fund is efficiently run and delivers economies of scale.
Talking to Room151, Mpofu explains that all of Haringey’s listed assets are already invested through the pool. However, the bigger challenge would be to getting to 100% of all assets by 2025, which would be a “tall order” for the fund, “especially considering the nature of some of the fund’s private markets allocations, we can’t exit those strategies overnight”.
“Infrastructure debt is a key one for us, as it has a very long investment period and underlying assets that are not easy to trade. So, unless there’s a mechanism for the pool to basically take those assets and bring them onto the pool, they will likely remain unpooled for some time,” Mpofu said.
He highlights that another area of concern is commercial property and how this will be pooled without incurring significant costs to the fund.
But Mpofu added that he anticipated that the discussion regarding pooling and consolidation would be is an interesting area to keep an eye on over the coming months.
Tim Mpofu will be speaking at Room151’s Private Markets Forum at the London Stock Exchange on 4 June, click here to register for the event.
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