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Lothian backs merger of Scottish local authority funds

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Scotland’s second largest local authority pension fund has voiced support for a full merger of the country’s 11 local government pension schemes (LGPS).

The £6.7bn (€7.5bn) Lothian Pension Fund backed the option in its response to a consultation launched by the Scottish LGPS Advisory Board in June, a view at odds with that of Scotland’s biggest public sector fund, Strathclyde .

Lothian’s pension committee chair Alasdair Rankin said: “We acknowledge that merger is not a panacea and will involve significant change, particularly in relation to governance, which may not be palatable to some stakeholders and merger to a single fund could be difficult.

“Therefore, [Lothian’s] preferred option would be to work with like-minded partners on a voluntary basis to develop a mutually beneficial merger solution.”

Lothian said it had made “significant inroads” into collaboration with other funds, primarily through setting up a fully authorised internal asset management function, which it shares with the schemes for Falkirk and Fife.

The setup allowed funds to work together, address key person risks and develop trust within the current structure, the fund said, with costs being shared across participants in the collaboration.

There had not yet been any significant impact on any of Lothian’s investments through the collaboration, the pension fund stated, but the arrangement was expected to evolve to bring benefits from greater overlap in investments.

However, it warned that the governance of the collaborative arrangements were not straightforward.

“While other funds rely on advice from Lothian, they need to continue to be resourced appropriately to make decisions for their respective funds,” the scheme said. “Further, there are practical constraints to the expansion of this type of collaboration.”

The advisory board presented Scotland’s LGPS funds with four options: retaining the current structure; promoting greater co-operation in administration and investments; pooling investments in a manner similar to the LGPS funds in England and Wales; or merging into one or more larger funds.

Lothian’s preference was completely different to that expressed by the £21.5bn Strathclyde Pension Fund earlier this month.

The Glasgow-based fund told the advisory board there was no evidence to suggest the current model was fundamentally flawed, and that no major change was necessary.

Scotland’s LGPS system

Source: 2017-18 annual reports. Data correct to 31 March 2018.
FundAUM (£m)
Dumfries & Galloway Council Pension Fund856
Falkirk Council Pension Fund2,289
Fife Pension Fund2,421
Highland Council Pension Fund1,884
Lothian Pension Fund Group6,666
North East Scotland Pension Fund4,118
Orkney Islands Council Pension Fund366
Scottish Borders Council Pension Fund685
Shetland Islands Council Pension Fund460
Strathclyde Pension Fund20,806
Tayside Pension Fund3,704
Total44,256

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