Case study: Shared services saves schemes 20% costs

The joint corporate director of finance at Cambridgeshire and Northamptonshire said the councils are targeting 40% savings for the council, mirrored at their pension scheme level.

In order to take advantage of the shared efficiencies, the schemes had to reduce job numbers and activate powers to directly invest in assets, according to Nick Dawe, corporate director of finance, property and performance at the authorities. 

This has allowed them to have the investment expertise and clout of a combined £3bn scheme, he added, as well as the lion's share of the administrative savings, without the costly legal process of merging.

"Based on combined administration costs for the both authorities of  £1.2m per annum the plans show a delivery of savings of around £500,000 per  annum are achievable," he said. 

"In addition to this it is planned to drive down other fees  and charges paid to third-party advisers."

This shared approach was welcomed by the final report of the Independent Public Services Pensions Commission, chaired by John Hutton.

It said: “Central and local government should closely monitor the benefits associated with the current co-operative projects within the Local Government Pension Scheme with a view to encouraging the extension of this approach, if appropriate, across all local authorities.”

Dawe expects the government’s response to the commission will be a little more forceful in encouraging this kind of shared services.

Working together

The decision to save money through shared services was a business decision of the two councils, with clear benefits for the pension schemes they ran.

As the councils had not decided to pool the assets, the decision-making burden on the schemes was not as great as it might have been, according to Dawe.

He said: “We can bring together two pension administration teams – the people that keep the records, make the pension payments and give advice to scheme members or contributors.”

This would mean the reduction in jobs over time, the “simplification” of procedures and the use of shared technology.

Other teams merged in the process were those working on treasury and investment management, now in charge of an aggregate £3bn of funds.

Dawe said: “We can now have much more dedicated resource looking at investment management and returns ourselves.”

Before the decision to pool expertise, each scheme would have been reliant on investment intermediaries, but now was able to put teams at work in pursuing direct investments.

This required the Cambridgeshire scheme to review its investment strategy design and delegation in order to “turn on” the permission to make direct investments, with Northamptonshire set to follow suit.

The schemes are also testing in-house investment terminals to provide them with the technology to inform these higher-level decisions.

While the major mandates will remain unchanged, the alternative investments such as private equities can now be accessed directly, with higher returns expected to follow.

“We would expect the 12-15% return from private equity, over an economic cycle, whereas you would be looking to 6-7% from your more standard equity investments,” Dawe said. “Some of them won’t deliver that, and some will deliver 20%.”

The combined experience allows the scheme to make use of particular expertise among the investment team.

He added: “I can now differentiate between the team member who is an expert at making bond placements and calling operational loans, versus that one which is."

The schemes maintain separate investment strategies for their separate assets, but claim savings by these management efficiencies that are close to those which would be gained from full unification.

“You are at least making 80% of the possible savings that total pooling would get you with only 20% of the effort.”

In order to fully pool the funds, the schemes would need to have to invest in drawing up articles of memorandum and agreeing a “unitised” approach to fairly divide up returns, he added.

The shared services team are currently in discussion with other local authorities schemes about extending the model, as public sector organisations seek efficiencies across the board.