Lothian Pension Fund’s in-house investment team will compete for private sector mandates once it receives approval from the UK’s regulator, the first local authority fund manager to do so.

The Edinburgh-based scheme said it filed for Financial Conduct Authority (FCA) authorisation, a year after winning approval for a standalone, limited company and two special purpose vehicles (SPVs) to house its investment staff, and hoped to receive approval by early 2016.

In a statement, the £5.5bn (€7.5bn) local government pension scheme (LGPS), which currently manages 60% of its assets internally, said FCA authorisation would offer regulatory certainty.

“The structure will also allow [Lothian] to collaborate more effectively with LGPS and other private sector pension funds/institutional investors in the alternative investment and other markets in which it operates,” it said.

The focus on alternative assets would see Lothian build on its partnership with the £1.8bn Falkirk Council Pension Fund, for which it currently advises on a £30m infrastructure mandate.

The fund also cited its alternatives portfolio as one of the driving forces behind its 16.5% return over the course of the most recent financial year. 

Lothian is not the first LGPS to work closely with fellow local authority funds, following on from several collaborative efforts by the London Pensions Fund Authority (LPFA) with both Greater Manchester Pension Fund and Lancashire County Pension Fund.

The initiatives were spurred by the UK government’s desire to pool LGPS assets, currently worth £230bn across 101 funds.

The partnership between the LPFA and Lancashire has also said it will apply for FCA authorisation, as has the collective investment vehicle backed by London’s 32 boroughs.

But Lothian is believed to be the first to declare publicly its intention to work with funds outside of the LGPS.

Lothian’s statement added that the corporate structure for its SPV would emulate that of equivalent private sector funds, which would allow the further development of its in-house team.

Funds including those for employees of BAE Systems, Barclays and BP have in-house asset managers. 

As of May, LPFE Limited, the company wholly owned by Edinburgh council, directly employs five of Lothian’s in-house team, including investment and pensions service manager Clare Scott.

Lothian added that, in applying for FCA authorisation, it would “further support and reinforce” the in-house team’s status as professional investors, alluding to changes to financial regulation requiring a greater focus on staff expertise.

The emphasis on the team’s professional status is a likely reference to the revised Markets in Financial Instruments Directive, which will classify LGPS clients as retail investors.

The Local Government Association has warned that a reclassification could trigger a fire sale of LGPS assets worth £115bn.

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