Chancellor Rachel Reeves announced the intention to replicate the “Canadian model” to “fire up” the UK economy. However, commentators warn that while there is potential for the model to unlock potential within the Local Government Pension Scheme, it “won’t be easy”.
Rachel Reeves said she wants the UK to learn lessons from the Canadian model and “fire up” the UK economy ahead of meeting with major Canadian retirement funds which have invested “billions of pounds in the UK economy in recent years”.
She urged the funds to continue backing Britain and take home lessons about how consolidation of pension schemes into larger funds can help drive investment in productive assets, such as infrastructure and high-growth businesses.
The meeting is part of “intensive” industry engagement for the landmark review of pension fund investment announced last month to boost investment in the UK and deliver higher returns for people’s pension pots.
Reeves said: “The size of Canadian pension schemes means they can invest far more in productive assets like vital infrastructure than ours do.
“I want British schemes to learn lessons from the Canadian model and fire up the UK economy, which would deliver better returns for savers and unlock billions of pounds of investment.
“We’re already beginning to see schemes announce plans to invest. That’s a vote of confidence in our work to fix the foundations of the economy, rebuild Britain and make every part of our country better off.”
Richard Tomlinson, chief investment officer at LPPI said that identifying Canada’s ‘Maple 8’ as a model for success for the UK is a strong starting point to unlock the “enormous potential” within the LGPS.
He said: “Our own analysis shows that aligning more closely with the Canadian model could deliver an additional £16bn of investment into much-needed UK infrastructure development.
“This would come, in part, from mirroring the Maple 8’s asset allocations, which tend to favour private markets.”
However, he said that if the chancellor is serious about increasing the flow of pension fund capital to the UK more broadly “we must also see a concerted effort to break down barriers to investment”.
He said: “Currently, execution and regulatory risks all too often slow down or deter investors. The government needs to continue on its path to planning reform and consider formal incentives to encourage investment in assets that help pension funds deliver on their primary fiduciary responsibilities to members.”
Tomlinson also welcomed the chancellor’s indication that greater consolidation of LGPS pools is on the cards.
He said: “Further consolidation of funds could help remove needless layers of decision-making and allow investment managers to be more agile. With 100% of our client’s funds pooled, we see this in microcosm at LPPI with above-LGPS average returns. Replicated across the LGPS, greater pooling of funds could deliver better returns for both UK plc and pension savers alike.”
Steve Simkins, partner and public services leader at Isio said the increased scale can bring benefits for LGPS in terms of value for money and increased flexibility to invest in the UK’s economic growth.
He added: “There are governance and operational improvements on offer if the right structure can be achieved, but with the ambition looking like it’s a big step beyond current pooling arrangements, it remains to be seen how this can be achieved in practice.”
Simkins warned that there will be challenges along the way in terms of integrating the local needs and views of underlying funds and their employers, especially with the excellent overall funding position.
He said: “Integrating investment portfolios, administration and governance at this scale will be a huge endeavour.”
He added that more scale can be achieved, but it needs to work “from the bottom up as well as top down”.
Jon Dean, head of retirement strategy at Altus Consulting agreed that replicating the Canadian “Maple 8” model would not be an easy feat.
He said: “The success of the Maple 8 model has been attributed to having sufficient scale to justify running the portfolio in-house to manage down costs. Scale means the fund can create dedicated research and portfolio management teams for each asset class, rather than deploy generalists and hire investment consultants.”
Dean said that these superfunds can also access investment opportunities in illiquids and infrastructure that are unavailable to smaller funds, but are better aligned to the long-term liabilities of the scheme, with the added benefit that returns are often uncorrelated with those of exchange-traded assets.
Another Canadian differentiator, he pointed out, is the adoption of business models that incorporate not just asset ownership, but some level of control – for example, as operators in their property portfolios.
Dean believes that UK LGPS superfund has the potential to unlock all of these benefits “if thoughtfully designed and well executed”.
He added that there was, however, no guarantee that it would invest more in UK plc.
He said: “As we can see from Canada’s example, they spread their bets across the globe, and trustees must be mindful first and foremost to manage the fund in the best interests of the members.”
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