The debate around merging Local Government Pension Schemes (LGPS) into super funds rumbled on this week after research revealed some LGPS funds are paying three-times as much as similar-sized schemes for investment management services.
The research compared the £2.68bn Devon and the £2.62bn Staffordshire pension funds, both of which have a similar allocation to different assets and hold the same three largest stocks. Yet over the past nine years Staffordshire has paid almost three-times as much as Devon in fees.
The top bods at the London Pensions Fund Authority (LPFA) will no doubt have been rubbing their hands together, as the findings add further weight to its ongoing crusade to pool together London’s funds to capitalise on economies of scale. Indeed, LPFA chairman Edi Truell said this week the research shows proposals for merging into ‘superpools’ of up to £50bn would result in “ markedly reduced fees for LGPS funds, improving net returns and helping to reduce deficits”.
While not meaning to play the role of diplomat here, I can see both sides of the argument. From LPFA’s side, there is evidence that pooling funds would both improve investment performance and provide schemes constrained by due diligence capabilities the opportunity to access more esoteric asset classes and investment strategies.
But, from the other side, investment performance from some of the smaller LGPS funds has outstripped that of the £4.2bn LPFA. Wandsworth Council’s own research revealed it would be about £150m worse off had it been invested in LPFA’s active sub-fund over 10 years to March 2012. In a merged super fund, who would be accountable for underperformance and how would that feed through to a borough’s council tax payers?
Sometimes you just can’t force people to get along at first, there are times when things have to develop naturally. It is reassuring that we have seen this among some councils which already talk to each other about asset managers, asset classes and opportunities.
In some situations compulsion is necessary – take auto-enrolment as an example – but forcing the issue here is leading to politically-charged backlash. The best solution in this case is to avoid making a merger compulsory but make it possible for funds who want to voluntarily merge because it is to their mutual advantage to do so.
Let’s just hope the upcoming review of the LGPS and if its existing structure is fit for purpose – called for by local government minister Brandon Lewis last week – remembers the most important factor here: the scheme members.
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