Industry reaction to £85bn active-passive LGPS shake-up

The government response to its call for evidence on how local government schemes could create cost savings and realise economies of scale has focused on creating passive common investment vehicles for equities and another for alternative assets.

Beginning of the end for active fund management? LGPS actuaries conclude extra costs not justified by returns.http://t.co/VXdshMl3Mv

— Norma Cohen (@NormaCohen3) May 2, 2014

As the FT reported:

"[The government] believes £85bn in actively managed equity assets should be moved to passive management through a common investment vehicle. This would save LGPS some £420m a year in investment fees and transaction charges.

"A second proposal is to move assets held in fund of funds arrangements – which incur higher fees than other actively managed accounts – into a common investment vehicle for alternative assets. This, it is estimated, would save LGPS a further £240m a year."

This has picked up on a wider trend in local government pension schemes, with Shropshire County Pension Fund in September becoming the latest to up passive management to reduce its fees.

Early reaction came in from industry members with some hailing it as a "defining moment" for the LGPS:

Michael Johnson, research fellow at the Centre for Policy Studies

"The government’s decision to place the underlying research report, independently produced by Hymans Robertson, into the public domain is welcome. This introduces a degree of transparency hitherto unseen in public service pensions, and robustly shows that the additional costs associated with active fund management, relative to passive management, are unjustified."

John Wright, head of public sector pensions at consultancy Hymans Robertson

"Against the backdrop of poor information, full-scale merger of funds seemed the likeliest route – but now the story is different. CIVs 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."

Susan Martin, chief executive at the London Pensions Fund Authority

“While we are very disappointed that the consultation only sets out detailed proposals for collective investment vehicles, we are pleased that it invites “any feasible proposals for the reduction of fund deficits. We believe that focusing only on asset management misses a significant opportunity for deficit reduction. 

"Our proposal for super pools of LGPS funds goes further than CIVs, including both asset and liability management, enabling the LGPS deficit to be tackled from both ends. CIVs are likely to deliver some investment-related cost savings and improved economies of scale, however, these are benefits that some councils can already harness through multilateral arrangements."

Ros Altmann, independent pensions expert

"Passive management will not outperform indices, due to its costs, but the lower fees charged by passive managers can often lead to better performance relative to active managers who underperform.  This is likely to prove the most contentious part of the proposal and it could be that some funds will still want to invest some of their assets with active managers in the hope of adding extra value.

"These proposals are of interest to the wider pensions industry too, since the principle of pooling assets could help a number of other smaller schemes who are struggling with high ongoing costs and large deficits.  It will be interesting to see the responses to the consultation."

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