UK government pressures local government schemes into asset pooling
The UK government has told Local Government Pension Schemes (LGPS) to present it with cost-saving measures or face the strict implementation of its own pooled investment approach.
In Budget documents released by HM Treasury today, the Conservative government elected in May said it would work with the LGPS to ensure that “pooled investments significantly reduce costs”.
Local-government savings was a key theme in the previous Conservative-led coalition government, which aimed to cut investment-management costs among the LGPS.
In further detail today, the government said it was now inviting local governments to approach it with their own proposals to meet a “common criteria” for cost-savings for pension funds.
The government added that schemes failing to submit proposals could be forced to pool investments.
It will consult on the details of the “common criteria” before legislating to ensure its own pooled investment approach can be forced onto non-complying schemes.
On today’s annoucement, NAPF chief executive Joanne Segars said the organisation would work with the government on its new consultation.
However, she added: “It’s clear pooled investments will work most effectively where they arise out of natural collaboration between funds rather than where funds are forced to invest together.”
The 89 LGPS in England and Wales, with more than £190bn (€270bn) in assets, are still awaiting an official government response to the consultation that proposed the creation of two collective investment vehicles (CIV) for listed assets and alternatives.
The proposals, from the last government, also called for shifting all listed assets into passive management, to save investment management fees.
The statement in today’s Budget is the first sign the new government is continuing its work on pooling investments.
But it has seemingly retracted from its single approach and appears willing to examine industry proposals first.
Recently, two LGPS schemes from London and Lancashire won approval to create a partnership that aims to create a CIV and merge back-office functions, with the view to saving £32m by 2021.
The CIV and passive management ideas put forward by the Department for Communities and Local Government (DCLG) in May 2014 were widely criticised by the National Association of Pension Funds (NAPF), as well as LGPS funds with in-house investment teams.
Despite the DCLG’s launching the original consultation on pooling investments in May 2014, today’s statement from HM Treasury highlights tensions within government departments that have been blamed for the legislative delay.
Bob Holloway, who heads up DCLG’s pensions department, said the delay was down to disagreements between his department and others within the government.
In April, IPE learned that several schemes with long-term records of in-house investment management were considering legal action against the government should it consider forcing through a mandatory shift to passive management.
They based their proposals on research conducted by consultancy Hymans Robertson, which showed the collective 89 schemes would have made significant savings but with higher investment returns had they invested equities and bonds passively.
However, the consultancy distanced itself from the government consultation and said it believed active management had a place within the LGPS.