LGPS transparency code to show investment costs 'over £1bn' [updated]

Investment management costs of local authority pensions in the UK are likely to be over £1bn for 2017, following the introduction of a new transparency code.

The £217bn Local Government Pension Scheme (LGPS) paid out £805m to investment managers last year, according to LGPS annual reports.

Jeff Houston, head of pensions at the LGPS Board, said the likely rise was not an increase in manager fees but greater disclosure of total costs under the board’s transparency code and accounting guidance from the Chartered Institute of Public Finance and Accounting (CIPFA).

The LGPS Board unveiled the code last month at a conference hosted by the Pensions and Lifetime Savings Association. It is a variant on a disclosure template from the Netherlands, adapted the scheme board, aided by Chris Sier of Newcastle University’s Business School and in negotiation with the UK’s asset management trade body, the Investment Association.

The code’s introduction coincided with an investigation by the UK’s Financial Conduct Authority (FCA) into the asset management industry. It reports its final findings tomorrow, covering how to improve transparency, competition, and value for clients. It issued a critical interim report on the industry last November.

The upwards trend for LGPS investment costs is already established – reported costs have almost doubled since 2013 – but Houston said he expected another leap this year.

The FCA is rumoured to want to make the transparency code universal, but implemented by a new standards-setting body rather than the FCA itself.

Although the LGPS Transparency Code is voluntary, it has momentum. So far six firms have signed up, including Baillie Gifford, Capital International, Legal & General Investment Management, and Montanaro. Other big houses such as BlackRock are expected to follow.

Signatories have to report transaction costs, broker commission, exit and entry charges, and all other fees paid to third-party funds on top of investment management. Previously, they simply reported their management fee.

The mandate for a third-party firm to ensure compliance with the code is due to be issued by the LGPS Scheme Board shortly. Signatories have a year’s grace to report using best estimates, but from 2018 their data will be scrutinised by the successful bidder for the compliance mandate.

Houston said the purpose of the transparency code was to enable local government to measure costs, not simply to beat down manager fees. “You can’t measure costs if you don’t know what they are,” he said.

He also noted that the LGPS code was constructed in conjunction with the industry, not imposed on it. The code currently applies to listed securities management only. Discussions with private equity managers are still in progress.

Note: This article was updated to clarify how the LGPS transparency code was developed.