How LGPS members are responding to collective investment reform

The government consulted in May on two common investment vehicles across England and Wales – one for listed assets, and another for alternative assets, that could save £660m a year in investment costs. 

The concept of delivering a single, national CIV without this level of buy-in is difficult to imagine

Hugh Grover, London Councils

London Councils, which represents 32 London Boroughs and the City of London, revealed last month the detail of its own collective vehicle, which aims to achieve substantial savings for its members.

Michael Johnson, research fellow at the Centre for Policy Studies, said such regional structures were a “complete waste of local taxpayers’ money”. “It would only water down the economies of scale that are there to be harvested,” Johnson said.

The government’s consultation said its proposals on a single platform “are most effective when adopted by all 89 funds”.

Linda Selman, head of LGPS investments at consultancy Hymans Robertson, which provided the cost-savings analysis to the government, said: “If you have too many CIVs you risk diluting the benefits of economies of scale.”

But she added there could be disadvantages of one super-pool of assets if its size hampered access to well performing active managers: “If you have too few [CIVs], you could have diseconomies of scale.”

In particular, actively managed funds could suffer on access to the best managers, if public sector schemes were forced into one superstructure, Selman said.

But Hugh Grover, project leader for the London Councils’ CIV, said the structure was a collaborative step that would achieve “real and significant savings”. 

"The concept of delivering a single, national CIV without this level of buy-in is difficult to imagine," he said. “The government is fully aware of what we are delivering, and much of the logic of their consultation reflects the work we have been doing."

Other local government funds are awaiting the government’s next move. Philip Latham, manager of the Clwyd Pension Fund, said the eight Welsh members of the LGPS had put their collaboration plans on hold until the Department for Communities and Local Government issues its response to the consultation, which closed on July 11.

He said: “There is no point going down a particular route if whatever comes out of the consultation is something that may be slightly different.”

Independent pensions commentator John Ralfe said the economies of scale argument did not work past a certain level of assets.

“You can’t negotiate a lower fee past a certain point,” he said. The real problem for the reform will be those funds that will resist any kind of collaboration, he added.

A shorter version of this article appears in today's Financial Times