A review for the think-tank by CPS research fellow Michael Johnson into fund management costs across the LGPS concluded that, over the last decade, the LGPS’s assets have under-performed the major UK and global equity and bond indices.
Over the last decade, the combined assets of the 89 LGPS funds in England and Wales increased in value by a nominal 79%, to £214bn at 31 March 2016, Johnson said, and he claimed passive investing (where funds are invested in benchmark indices rather than actively traded by managers) could have earned more.
Such active management across the 89 LGPS funds in England had led to reported fees of over £4.5bn. In addition, Johnson claimed there were likely other fees, including performance-related payments to managers of alternative investments such as private equity and infrastructure, of between £3.6bn and £4.6bn, which are not reported.
This is based on an assumption of the likely costs paid to alternative assets fund managers. Such payments include “carried interest” provisions, which represent the fund manager’s share of the fund's profit, typically some 20% of the net profits. LGPS funds, including Scottish and Northern Irish funds, have one of the largest private equity portfolios in the world.
Johnson’s report comes amid a Financial Conduct Authority examination of how to improve the transparency of management of charges across the pensions investment industry.
The CPS report also highlighted the range in total annual costs per member within the LGPS, with Enfield’s £592 figure in 2015-16 over 20 times larger than West Yorkshire’s £28.
Johnson said a dramatic simplification of the LGPS was needed to reduce these differences, with the creation of asset pools and specialist investment vehicles with their own independent governance committees.
Current government plans to pool the assets of the 89 LGPS schemes in England and Wales into eight pools would not be sufficient, he said.
Instead, the proposed pools should be in competition to manage assets as part of an eventual plan to reduce the number of pools to three. These funds could then be used as part of initial investment in infrastructure-focused sovereign wealth funds, which would be close to the initial intention of then chancellor George Osborne when he first proposed the move in October 2015.
Responding to the CPS report, the leader of Birmingham City Council John Clancy said West Midlands Local Government Pension Fund (WMPF) should stop using external investment managers. WMPF was “sucking in” money from Birmingham and the six other West Midlands metropolitan councils that could be better spent paying for local services such as social care.
“The Centre for Policy Studies report is a vindication of what I have been saying for a long time – local government pension schemes across the country and here in the West Midlands are a dysfunctional mess and not fit for purpose,” he stated.
“There is no need to hire investment managers at all. But the brutal truth is that funds up and down the country have happily spewed out hundreds of millions of pounds to City advisers for no real return whatsoever. This is a national disgrace, which is sucking money from local authorities at a time when public services are under threat as never before. If investment managers do not add value to a fund, they should not be paid.”