How collaboration could save LGPS £80m a year in fees

While the two agreements differ in scope, they show it is possible to think creatively and to work together to build a better LGPS.

The partnerships also align with our responses to the current government consultation into the future of the LGPS, which called for more collaboration to realise the benefits of increased scale. Reducing investment costs is a key element of this.

First, a partnership approach has the potential to deliver economies of scale and cost-savings through improved efficiency.

We expect to achieve lower fees for externally managed investments due to larger investment mandates, optimised fee arrangements for direct investments and improved cost management through more sophisticated allocation modelling.

A pooling of investment expertise also allows more assets to be managed in-house rather than by external fund managers, significantly reducing exposure to manager fees.

While there are one-off costs associated with putting partnerships in place, these are greatly outweighed by the potential benefits.

For example, data from CEM Benchmarking show the LGPS pays approximately 10 per cent more in fees to fund managers, on average, than a sample of 20 North American, Australian and European pension funds.

The overseas funds were able to achieve a better cost profile owing to recruiting, and making a greater use of, in-house investment staff.

If UK local government funds delivered similar performance, which could be possible through greater collaboration, they would save close to £80m a year.

At London Pensions Fund Authority we also have a concentrated, long-term focused buy-and-hold investment strategy for a significant proportion of our equity investment.

Buy-and-hold delivers savings through low turnover of stocks, while in-house portfolio management means savings on both base and performance fees.

While these solutions are not a panacea for LGPS deficits, it is vital we continue to work together to achieve the best results we can for our members.

Susan Martin is chief executive at the LPFA

¹The original version of this article incorrectly gave the figure for the asset-liability management partnership as £10m, as supplied by the LPFA. After publication, the LPFA contacted Pensions Expert to correct the figure. The article has been updated.