Local Government Pension Scheme (LGPS) investment performance has lagged major global and UK benchmarks over the past decade, despite investment management fees more than doubling, a think-tank has claimed.
The Centre for Policy Studies (CPS) has warned that the LGPS is losing money to active fund management companies which, it claims, are failing to bring sufficient returns to the scheme.
In a report entitled The LGPS: a Lost Decade, the CPS revealed as of 31 March 2016, the combined assets under management (AUM) of the 89 LGPS funds stood at £214bn – a nominal increase of 79% since 2006/2007.
But despite this rise in AUM, the CPS claimed the managers running this money have underperformed the major UK and global equity and bond indices during the period.
The paper observed the LGPS’s funds achieved a 67.2% nominal return over the last 10 years compared with 68.8% for the Barclays Equity index; 121% for the FTSE All World index; 80.4% for the Barclays Gilt index; and 106.1% for the World Government Bond index.
Yet despite this underperformance, the investment management industry had been handed £4.5bn in reported fees, the CPS said. It added that fees as a percentage of asset market value more than doubled (111%) over the period.
And in terms of unreported fees, including performance fees paid to alternative asset managers, the CPS estimated between £3.6bn and £4.6bn had been handed to managers over the 10-year stretch.
The report also claimed the cost of fund management per individual member jumped 110% over the period to £178.30.
CPS research fellow Michael Johnson, author of the report, wrote: “One would expect costs to fall over time, not just in real terms but also in nominal terms, partly through tech-driven cost savings.”
He added: “In addition, there is a reasonable expectation that as fund size increases, economies of scale cut the operating cost on a per member basis. Consequently, the 110% increase in the LGPS’s total costs per member, over the last decade, is an utterly shocking figure.”
Johnson said the findings were a strong endorsement of passive fund management which he believed would have led to smaller funding deficits, as well as being a lot cheaper and considerably simpler to implement.
He also argued that the pooling of LGPS funds’ assets in England and Wales would have little material impact on the sustainability of the pension schemes, given the scale of their deficits.
The eight pools are each predicting different levels of annual cost savings ranging from £13m to £33m with the potential to increase further.
However, Johnson said: “Pooling needs to be accompanied by a much more assertive approach to asset management, including the consolidation of all private equity and infrastructure investments into specialist vehicles that should aspire to become centres of global expertise.”
The paper also proposed a “dramatic structural simplification” of the LGPS is required, involving the abolishment of local architecture to leave just the asset pools and specialist investment vehicles, each with an independent governance committee.
And Johnson went further, saying that ultimately the government should use LGPS assets to seed an infrastructure-focused sovereign wealth fund to invest in airports, railways, roads and utilities, as well as new housing projects.
