Johnson lambasts billion-pound costs of LGPS

In a trenchant email, Michael Johnson, one of the architects of freedom and choice and research fellow at the Centre for Policy Studies, told Pensions Expert that the last year’s fund management costs of the LGPS were equivalent to 0.38 per cent of assets, up from 0.26 per cent for 2013-14.

All LGPS fund management should be in-house, not least to retain the still unreported private equity funds’ carried interest, plus hedge funds’ performance fees 

Michael Johnson, Centre for Policy Studies

He said: “The investment costs of the LGPS’s closest UK comparator by size, the Universities Superannuation Scheme, totalled 0.31 per cent last year, down from 0.47 per cent for 2013-14. For the BT Pension Scheme – the UK’s largest private sector funded scheme – they are at 0.19 per cent of assets, half that of the LGPS.

“Last year [2017-18] the cost of running the LGPS was reported as £1,189m, including £1,016m (85 per cent) in third-party fund management fees. This is a staggering sum for what is, ultimately one occupational pension scheme. But even more concerning is that the total annual costs per member show an appalling increase of 142 per cent over the past 12 years.” 

Mr Johnson’s solution is  that “all LGPS fund management should be in-house, not least to retain the still unreported private equity funds’ carried interest, plus hedge funds’ performance fees [estimated at an annual £200 in 2013]”.

Real returns lag real GDP growth

He also criticised LGPS investment performance. The scheme has returned an annual average of 7.7 per cent over the past 10 years, comfortably ahead of inflation. Asset values have almost doubled in less than a decade, increasing to £275bn at the time of the scheme’s 2018 annual report from £141.6bn in 2010.

While contributions also play a part, over the 2017-18 reporting period the majority of this increase came from investment.

Jeff Houston, head of pensions at the Local Government Association and secretary to the LGPS scheme advisory board, recently told stakeholders at a Pensions Expert forum: “The good news is you’re really good at investing.” 

However, Mr Johnson argued this real performance should then be compared against real GDP growth.

“Comparing this with real-terms aggregated performance for all of the LGPS’s England and Wales funds shows that the latter, in aggregate, comes out 5.5 per cent behind the benchmark over the 12-year period,” he said.

Costs can bring value

Commentators in the wider pensions industry defend the LGPS against these accusations. A spokesperson for the Pensions and Lifetime Savings Association said the fund “has performed strongly and consistently over the past 10 years”. 

Meanwhile, John Simmonds, client relationship manager at CEM Benchmarking, which works for about half of the LGPS funds, said: “We need to stop measuring investment costs on a pound-per-member basis. It makes no sense, it’s misleading and unhelpful.

“There are huge differences in costs between asset classes, so any sensible comparison needs to take account of asset mix differences and to look at cost in the context of performance.”

However, he does believe it is “appropriate to ask if active management is being rewarded”, by asking whether the fund beat sensible benchmarks after costs”.

Mr Simmonds said: “The answer for LGPS is that we just don’t know if the funds are collectively adding value. Why? Because what is being claimed as value added is often nothing more than noise caused by weak portfolio-level benchmarks, particularly in private markets where the costs are highest. 

“The problem is widespread. Some of the benchmarks in use within LGPS may be fair proxies for liabilities, but they do nothing to reveal investment skill and don’t offer up low-cost investable alternatives."

In-house not always the answer 

The PLSA spokesperson added that the LGPS has led work on improving cost disclosure, ultimately leading to the Cost Transparency Initiative that now has almost universal sign-up from asset managers.

“Data from the Scheme Advisory Board indicates that the LGPS has a very competitive focus on administration costs despite being a highly complex scheme that has been through radical changes in recent years,” the spokesperson said.

Ian Neale, a director at Aries Insight, said: “A significant contributor to the rising cost of pension scheme administration and governance has been the proliferation of legislative and regulatory interventions. That part of the cost would not be reduced by bringing fund management in-house.”

However, Irwin Mitchell partner Penny Cogher pointed to the example of administration problems at London Borough of Barnet Superannuation Fund, arguing that some LGPS participants need an injection of professionalism.

“Local politics always has one eye on the next election and local authority resources have been slashed to he the bone. It’s not surprising that keeping hold of costs is almost impossible,” she said.