Government backs LGPS reforms but rules out mergers

2 May 14

A review of the Local Government Pension Scheme has ruled out mergers of the 89 funds in England, but has concluded that as much as £660m a year could be saved through greater use of common investment vehicles.

The examination of the structure of the LGPS by pensions experts Hymans Robertson, commissioned by local government minister Brandon Lewis, found the cost of asset management across the scheme in 2012 was £790m.

Hymans Robertson was asked to assess potential ways to cut these costs, including mergers of existing LGPS schemes, as part of a government call for evidence on possible reforms.

The report concluded that two main alterations could eventually save as much as £660m a year if introduced over ten years. Moving from an actively managed fund management approach for listed assets like bonds and shares to a passive arrangement through a common investment vehicle for funds would eventually save £230m in investment fees and a further £190m in lower transaction costs.

According to the report, the current active management regime employs a professional fund manager or investment research team to make discretionary investment decisions on its behalf. A passive approach typically invests assets to mirror a market in order to deliver a return comparable with the overall performance of the market being tracked, with less hands-on decision-making.

In addition, Hymans Robertson called for the creation of a common investment vehicle to invest in alternative assets, such as infrastructure projects, hedge funds, private equity and property. This would save £240m a year.

However, the report concluded that although significant savings could be realised by amalgamating the current funds into five, merger could take around 18 months longer to implement than common investment vehicles, meaning there was a significant reduction in the net present value of savings over 10 years.

Lewis said he accepted the recommendations and has published the proposed reforms for consultation. The government’s document stated that there was a strong case for achieving economies of scale through the use of common investment vehicles but, having considered the analysis, had decided to not consult on mergers.

‘Under the last administration, the cost of town hall pensions almost quadrupled to nearly £6bn, diverting taxpayers’ money from emptying bins, cleaning the streets and keeping council tax down,’ Lewis said.

‘This government is taking action to reduce the massive and unsustainable cost of state sector pensions. The proposals I am setting out today will help reduce investment costs by £660m a year. For the first year in recent memory, the cost of town hall pensions to taxpayers is now falling.’

Responding to the consultation, CIPFA pensions panel chair Bob Summers said: ‘CIPFA welcomes the government’s decision to build upon the excellent work funds are doing in developing a range of collaborative working initiatives across the LGPS and we look forward to continuing our work with DCLG and the shadow LGPS advisory board to help deliver a LGPS that remains sustainable and affordable for employers, taxpayers and members in the long term.’

John Wright, head of public sector pensions at Hymans Robertson, said the proposed changes represented a potentially defining moment for the LGPS.

A year ago we had little consistent, reliable data on what it costs to manage LGPS investments,’ he said.

‘There was therefore no clear diagnosis of the real problems and a serious risk of jumping to the wrong conclusions about areas with the greatest potential for cost saving and the most appropriate options for structural reform.

‘Against the backdrop of poor information, full-scale merger of funds seemed the likeliest route – but now the story is different. Collective Investment Vehicles are now the government’s leading option in this consultation. These vehicles can deliver investment scale benefits across the LGPS faster than merger. They also make it possible to preserve the local accountability and decision making that would be lost by merging funds.’


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