UK - Local government pension funds in the UK should save money by joining forces to become the country’s largest pension fund, an expert from the Centre for Policy Studies says.
If successful, the move is seen as possibly prompting smaller private sector funds to pool assets, in turn pushing the investment industry to lower commission and charges.
In a letter to several government ministers, Michael Johnson, research fellow of the right-of-centre think tank, said: “The LGPS (Local Government Pension Scheme) comprises 101 separate funds. Many of them are of sub-optimal scale, delivering sub-optimal performance.
“It would make eminent sense to bring them together, into what would then be the largest pension fund in the UK, with some £150bn (€179bn) in assets.
“Large pension funds enjoy substantial economies of scale, including commercial clout when transacting with the financial services industry.”
UK trade unions are in favour of LGPS fund consolidation, he said, citing their submissions to Lord Hutton’s commission and subsequent conversations he has had the public service trade union Unison and other unions.
“They understand that the subsequent improvement in fund performance, care of lower costs, would justify a significantly smaller increase in employee contributions than is currently being sought by the coalition, perhaps by 50%,” he said.
Consolidating the LGPS funds would, Johnson said, be in tune with the National Association of Pension Fund’s call for ‘super trusts’ to be set up.
It would also resonate with some initiatives from pensions minister Steve Webb, including ‘Operation Big Fat Pots’ - the amalgamation of personal pension pots.
In the LGPS context, ‘consolidation’ meant the sharing of externally procured services, such as actuarial and investment advice, he said.
“The individual funds (in varying degrees of health, ie funding status) do not need to be comingled, although opposition to so doing is a non-sequitur when they are, ultimately, state-backed,” he said.
There were several ways of achieving this, he went on to say. These included unitised schemes and segregate cell structures.
“At the very least, all administrative and procurement activities should be consolidated,” he said.
In his letter to government ministers, Johnson offered to co-ordinate any review of the structure and governance of the “staggeringly inefficient” LGPS.
“And were such a (state-led) initiative to come to fruition, considerable pressure would come to bear on the panoply of smaller private sector schemes,” Johnson said.
“Pulling these together into a few giant funds (…) would dramatically increase the pressure on the industry to address its high charges and commissions, and lack of transparency.”