Seven UK local government pension schemes (LGPS) from the Midlands are to merge their passive equity investment mandates to cut costs.
Led by the pension funds for Cheshire and Staffordshire, the schemes are looking to merge their passive equity holdings with one asset manager to save approximately 30% in investment management charges.
The schemes are to appoint an adviser to run the manager-selection exercise – which will form outside of the normal local government procurement process, with the schemes set to use a pooled fund.
The parties involved, which also includes Leicestershire’s pension scheme and four other Midlands councils, expect to have an appointment in place by November.
This move by the seven schemes chimes with suggestions from the government that all LGPS funds should invest in listed assets passively – and via collective investment vehicles – to cut charges.
However, this suggestion was made by the previous government, with the new Conservative department suggesting a more lenient approach in this year’s Summer Budget.
The £3bn (€4bn) Leicestershire County Council Pension Fund (LCCPF) put a report to its committee last week, seeking formal delegated power to move forward.
Leicestershire’s report said the seven schemes, after meeting in early August, agreed to move forward after concluding the assets were sufficient enough to reduce fees for passive equities.
Other LGPS schemes are invited to join, providing they can fit into the agreed timescale.
Further economies of scale, however, will be unlikely.
The outcome of the procurement process is that one manager, instead of four, will invest the assets for the group and provide a pooled investment fund to replicate the indices used by the pension schemes.
Should LGPS funds used pooled solutions, they will not be required to tender the appointment formally, as it is seen as an investment decision over a fund manager appointment.
The 30% savings figure was given to Leicestershire’s board based on discussions with managers by Cheshire and Staffordshire’s pension schemes.
Work – started by Cheshire and Staffordshire – began several months ago, with Leicestershire becoming involved towards the end of May.
Its report said the Summer Budget announcement meant the government wanted to see clear action from schemes to reduce costs.
“It has been clearly articulated by and to those who are closest to the process that the savings are expected to be significant,” the report said.
“A couple of funds working together to negotiate better fees with their managers will save money, but [they do] not get close to the ‘sufficiently ambitious’ requirement of the announcement.”
Leicestershire’s report added that it expected the government to favour geographical and asset-class pooled investments for the nearly £200bn LGPS in the 89 schemes in England and Wales, with each to be sized between £20bn and £40bn.