In a new report The LGPS: A Lost Decade, published by the Centre for Policy Studies, Michael Johnson warns that local government pension schemes are losing money to active fund management companies which fail to bring sufficient returns to the scheme. As of 31 March 2016, the 89 funds had combined assets of £214 billion, nominal increase of 79% over the previous decade.
The 89 individual LGPS funds show an extraordinary range in total annual costs per member; with Enfield’s £592 (2015-16) figure a staggering 21 times larger than West Yorkshire’s £28. The report shows that the larger the fund, or the more in-house the asset management, the lower the cost per member.
Michael Johnson comments:
“Over the last decade the assets [in LGPS’] have under-preformed the major UK and global equity and bond indices: passive investing would have been more rewarding. The only winner has been the industry, garnering over £4.5 billion in reported fees which, as a percentage of asset market value, have more than doubled over the last decade. In addition, this paper estimates unreported fees, including performance fees paid to alternative assets managers, to be between £3.6 billion and £4.6 billion.”
- Asset pooling will not solve the problem, the cost-savings anticipated will have little material impact on the sustainability of the pension schemes, given the scale of the deficits.
- Dramatic simplification of the LGPS is required, the local architecture should be swept away and replaced with asset pools and specialist investment vehicles with independent governance committees.
- Current scheme governance involves over 1,500 people, devoid of accountability, and their abject lack of curiosity is allowing scheme members’ and taxpayers’ contributions to be eroded by unnecessary, high and recurring fees.
The report includes 15 proposals for reform including:
- LGPS funds should be encouraged to part with any fund manager whose fees are tied to the size of the fund, fees should be predominantly performance-driven.
- The DCLG should discipline the funds internal audit functions and consider suing their external auditors
- The FCA should be encouraged to brief DCLG as to the implications for LGPS fund performance of the findings in its recent Asset Management Market Survey
However, the government could go further. The LGPS’ assets could be used to seed an infrastructure-focused sovereign wealth fund, thereby socialising the benefit of the assets across the whole of society: we all use airports, roads, and railways.
Indeed, this fund could be used to invest in future housing projects, tackling one of the most pressing issues facing current and future generations who will be hit by the pensions cliff edge to come.
Click here to read the full list of proposals and the report.