Local authority pension funds in the UK remain split over government proposals to reform the sector, as some advocate collective investment vehicles and others argue in favour of switching all investment mandates to a passive approach in an effort to reduce costs across the sector.
The Shadow Scheme Advisory Board (SSAB), set up to advise on the reform of the UK Local Government Pension Scheme (LGPS), said there was “universal agreement” on the need for more transparent and consistent report data across the sector that could inform potential reforms.
However, the Board’s chair Joanne Segars noted that there was less agreement as to what shape the reforms should take.
“There is a clear divide between those in favour of mergers and further consolidation and those who favour the status quo or a more modest move to scheme collaboration,” Segars, also the chief executive of the National Association of Pension Funds, said in her foreword.
“It is also clear there are a number of quite entrenched positions in this debate informed more by personal experience than by data or research.”
Outlining how stakeholders had responded on the contentious issue of scheme mergers compared with greater collaboration across authorities, the SSAB’s report noted that the majority spoke out in favour of framework agreements, whereby one authority tenders for services in such a way that allows other funds to benefit from the selected managers.
“The scale and extent of existing collaborative work is encouraging,” the summary said. “However, the savings identified above are relatively minor when compared with total investment costs.”
It continued that collective investment vehicles, allowing the funds to achieve the benefits of scale without a full merger, was the second most cited reform proposal, with some recommending the UK’s recently launched Authorised Contractual Scheme as a means of tax-efficient pooling.
The report also remarked that many had proposed a switch to passive investment, one that nonetheless raised concerns that it would concentrate mandates among a smaller number of asset managers.
The Board added: ”One key issue to consider is the potential impact on financial markets should all LGPS funds move to passive management where they are able to do so.”
The majority of respondents also raised concerns about the lack of data to reach informed decisions on reform, urging the creation of a set of data that puts all 89 funds in England and Wales on even footing.
While the absence of research was also an issue of concern, the Board highlighted work undertaken by Dutch pensions manager APG showing that, in the eight years to 2009, the LGPS outperformed its benchmark by 1 percentage point, returning 1.7% over the period.
“This research also showed large differences in investment performance between funds and revealed that larger funds consistently achieved higher investment returns over this period,” the Board’s response said.
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