Welsh local authority funds mull joint investment strategies
UK – All of Wales local government pension schemes (LGPS) are considering closer cooperation in order to save money and achieve better investment returns.
A report from the pensions sub-group of the Society of Welsh Treasurers (SWT), which represents the funds, has produced four possible models for collaboration and comes as London boroughs considered the potential advantages of pooling pension fund assets.
The consultancy said that funds could either work towards enhanced collaboration, a mid-range option based on a number of grouped or regional funds, the formation of a single all-Wales LGPS fund – or retain the staus quo.
The report follows up a 2010 study by PwC which established a prima facie case to look further at the potential for improving efficiency and service standards through organizational restructuring.
The latest report from March this year said there was no simple answer on the optimal number of Welsh local authority funds, or an easy answer to the best possible structure for the schemes.
"Given the existing organizational picture, and the funding complexities, any change would require careful planning and would take time to implement and achieve meaningful benefits," the report said.
It continued: "The work undertaken however clearly indicates that despite collaboration already being part of the Welsh fabric for pensions, there is more that can be done."
The report concluded that medium-term savings and improved investment returns could be achieved through enhanced collaboration, which it said should be pursued further. Enhanced collaboration was the option whereby the balance of service delivery and efficiency, cost of change, time and resource could be blended in the most effective way.
In particular, the pooling assets through a collective investment vehicle could achieve the apparent benefits of size, without the organizational upheaval, the report said.
It added that the potential financial benefit through any change varied considerably, with the smallest gains coming in the benefits administration area. Larger savings could be achieved from joint procurement and combining investments to reduce fund manager fees, with the biggest benefits from better investment returns through grouping investments together.
"This latter option is about grouped economies of scale and could generate sufficient additional investment returns to help manage employer contributions over the medium term through a collective investment vehicle across existing structures without the need to merge funds," said the report.
It said a collective investment vehicle was an attractive option because it could generate the same benefits as a merger without the time, complexity or transition costs associated with a merger. Changing funding strategies could also destabilize funds while bringing about a loss of local accountability, it added.
The report therefore recommended that no further research should be carried out on a potential merger of funds at present.
It nonetheless recommend drawing up a business plan in favour of a common investment approach to encompass common attributes benefiting larger funds, with a view of implementing the recommendations.
It also recommended creating an appropriate, responsive governance structure to drive and manage future collaboration initiatives within Wales, to explore the longer-term potential for consistent valuation and funding assumptions and standards, as well as developing minimum administrative standards.
The report mirrors a trend towards joint initiatives among local government pension schemes in the UK.
Similarly, the chief executive of the London Pensions Fund Authority has proposed merging all local government pension schemes in London.
However, critics have warned that a wholesale merger of London pension funds would face a number of hurdles, and that asset pooling might be a more practicable alternative.