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NAPF moves to kick controversial LGPS reforms into long grass

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The UK National Association of Pension Funds (NAPF) has called for the postponement of controversial local government reforms until after the next general election.

The UK’s representative body for pension funds, in its response to the government consultation on changes to the Local Government Pension Scheme (LGPS), said it was wrong to focus wholly on costs.

In May, the government published proposals that looked at forcing all listed assets in LGPS funds into a collective investment vehicle (CIV), which would only invest passively.

It also proposed a second CIV to invest predominately in alternative assets.

Both reforms were made to cut costs, with the CIVs achieving more scale than the 89 individual funds in England and Wales, and with passive investing being generally cheaper than active.

However, in consultation, the NAPF argued that operational problems at some poorly performing funds were more important than cost issues at all the funds.

It rejected the government’s move to mandate a shift of listed assets into passive vehicles, and voiced its support for a ‘comply and explain’ approach in statement of investment principles.

The proposal to shift all listed to assets to passive came after consultancy Hymans Robertson, mandated by the government, produced research showing that, on aggregate, active investment by the LGPS performed as well as the index over 10 years.

It then said the LGPS funds could save £660m on investment management fees by investing passively. 

However, consultancy Mercer, in its response, questioned the savings figure made by Hymans Robertson.

It argued that the savings were unachievable, as active management fees often include performance-based bonuses, and said comparing active with passive was unfair.

The consultancy said the government should focus on deficit management and governance over investment charges, which it said only made up a small part of LGPS costs.

The use of CIVs was another contentious issue in many consultation responses, with little support for the government’s proposals in their current form.

The Royal Borough of Windsor & Maidenhead (RBWM), an LGPS fund, said the government would do better to create a centralised procurement function for the LGPS, over CIVs.

RWBM also said the creation of CIVs specifically for the LGPS was unnecessary, as the set-up costs would negate any positive cost impact, and enough of these funds already existed in the private market.

Nick Greenwood, manager of the fund, said his view was categorically “no” for the creation of LGPS-specific CIVs, especially if it resulted in a multi-manager approach that required monitoring.

“Such a service does not come cheaply and is likely to negate or wipe out any cost savings made through economies of scale,” he said.

The fund strongly urged the government to reconsider proposals for a collective procurement service for investment mandates for LGPS funds.

However, the fund did back the use of pre-existing CIVs in certain circumstances, as they can be used to benefit from periphery services such as dividend collection, where scale clearly creates lower costs.

With regard to the shift to passive, the fund did not dispute Hymans Robertson’s findings.

However, it said the figures also showed that the effectiveness of active management at the 89 LGPS funds varied greatly. 

Echoing calls made the NAPF, the fund said the government should focus on why this dispersion exists, rather than mandating a collective shift to passive.

Greenwood said: “Much of the blame for poor underperformance is due to an over-reliance by LGPS funds on investment consultants and an extremely poor grasp of ‘risk’ and what it means to the end investor.”

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