Local authority schemes welcome government CIVs

The Department for Communities and Local Government last year issued a call for evidence on how to increase efficiency in the Local Government Pension Scheme.

This month it proposed combining LGPS listed assets into a passively managed CIV, in order to reduce investment costs. Another could also be used to access alternative assets but would be actively managed.

Research by public sector actuarial company Hymans Robertson into the structure of the LGPS estimated the combination of listed assets could result in savings of more than £660m a year, while a CIV for non-listed assets could produce savings of £240m.

Eight Welsh schemes have previously discussed combining assets to form a single scheme worth almost £7bn. One Welsh scheme manager, who asked to remain anonymous, said the government’s proposals for a passive CIV were positive.

This scheme made the decision to switch to more passive investments three years ago, but it was not a wholesale shift. “At the moment we’re still active in areas such as emerging markets in Asia because we still believe managers are still likely to find inefficiencies in the markets there,” added the manager.

The manager also said the scheme had concerns about giving responsibility to another body to choose active managers to invest in non-listed assets, given the dispersion of returns generated.

Swansea City and County Pension Fund was also involved in talks to establish a Welsh CIV and also welcomed the government’s proposals.

“We did a bit of work collectively as a group in response to that and our conclusion was supportive in terms of CIVs,” said Jeffrey Dong, chief treasury officer at the fund.

Justin Bridges, pensions services manager at Shropshire County Pension Fund, said his initial reaction to the government’s proposals for CIVs was positive and preferable to scheme mergers.

“It’s easier to set up because [with a] merger of funds transition costs are going to be a lot higher, I don’t think the majority of funds are in favour of mergers,” he said.

The government’s proposals would give local government schemes the opportunity to achieve bulk purchasing power, said Marc Hommel, pensions partner at consultancy PwC.

“But it’s not allowing schemes to fully merge to put in place best-of-breed governance to use bulk purchasing in the use of advisers and administrators to enable joint decisions around liability matching and group infrastructure,” said Hommel.

He said the proposals do not go far enough, adding: “The cost and complexity of doing a merger would be very quickly outweighed by the benefits." 

Chief executive of the London Pension Fund Authority Susan Martin has also said the fund is disappointed the government’s proposals only focus on asset management rather than looking also at liability management to reduce deficits.