Town halls could save £660 million a year with better pension management
2 May 2014 03:30 PM
Proposals aim to reduce
investment management overheads and improve
accountability.
Local Government Minister
Brandon Lewis yesterday (1 May 2014) published proposals for better pension
management that could deliver substantial annual savings for taxpayers that
will build to £660 million a year over 10 years.
The proposals draw on a public
call for evidence and a report from city pensions experts, Hymans Robertson,
who reported that the cost of investment in England and Wales was £790
million, much higher than previously thought.
The government’s proposals
aim to reduce investment management overheads and achieve a higher level of
accountability to local taxpayers including through an improvement in the
availability of transparent and comparable data.
The savings outlined in
the consultation are
comprised of 2 main elements:
- moving to passive management of
listed assets like bonds and shares, accessed through a common investment
vehicle; this could save £230 million annually by cutting investment fees
and a further £190 million by reducing transaction
costs
- using a common investment
vehicle to invest in alternative assets, ending the use of high cost
‘fund of funds’ to save £240 million a year
Common investment vehicles will
allow authorities to bring together their investments, helping them to take
advantage of their combined buying power and to invest more efficiently to
deliver savings. In addition, passive management of listed assets will
significantly reduce investment fees and transaction costs, without affecting
the overall investment returns of the Local Government Pension
Scheme.
Brandon Lewis
said:
Under the last administration,
the cost of town hall pensions almost quadrupled to nearly £6 billion,
diverting taxpayers’ money from emptying bins, cleaning the streets and
keeping Council Tax down.
This government is taking action
to reduce the massive and unsustainable cost of state sector pensions. The
proposals I am setting out today will help reduce investment costs by
£660 million a year. For the first year in recent memory, the cost of
town hall pensions to taxpayers is now falling.
Further
infromation
The government is keen to hear
from those with an interest in the Local Government Pension Scheme including
fund authorities, members, employers, suppliers and taxpayers. The consultation
will remain open for 10 weeks, giving anyone with an interest in the proposals
a chance to review the evidence and submit their views. Following the
consultation, the government will consider the responses as it firms up its
proposals for reform. Other key elements of the consultation proposals on the
Local Government Pension Fund include:
- Asset allocation will remain
with the local fund authorities.
- The government does not intend
to pursue fund mergers at this time.
- The consultation seeks views on
how these reforms, if adopted, might be implemented most
effectively.
- Hymans Robertson examined
aggregate fund performance for listed assets over the 10 years to March 2013.
They compared fund performance gross of fees in each asset class against the
market performance for that class. They found that there was no clear evidence
that the scheme as a whole had outperformed the market in the long term. They
concluded that listed assets such as bonds and equities could have been managed
passively without affecting the scheme’s overall
performance.
- The consultation acknowledges
the work the Shadow Board has done to date to improve data transparency, such
as bringing together the 89 individual fund reports. The government is keen to
support the Shadow Board in its work to establish a comparable baseline of
data, and looks forward to working with it to further improve fund
transparency.
- The consultation welcomes the
Shadow Board’s recommendation to develop a short-list of mechanisms for
managing fund deficits and to evaluate the costs and benefits of these
proposals. It asks the Shadow Board to continue its work in this area and
invites respondents to submit any feasible proposals for the reduction of
deficits.
Passive management typically
invests assets to mirror a market in order to deliver a return comparable with
the overall performance of the market being tracked. Passive is much cheaper
than active management, but if the right investments are chosen, active
management can allow investors to achieve higher returns. However, active
management can also expose investors to the risk of under
performance.
Alternative assets are non
listed investments such as infrastructure, private equity, property and hedge
funds. Listed assets are essentially equities (shares) and
bonds.
Many authorities currently use
‘fund of funds’ to achieve the scale needed to invest in
alternative assets. These often include several layers of fees, making them an
expensive way to invest.
Following an open tender
process, Hymans Robertson was appointed to provide a cost benefits analysis of
3 potential options for reform and to set out the barriers to implementation
and how they might be overcome. These options were 5-10 merged funds; 5-10
common investment vehicles; and 2 common investment vehicles (1 for listed
assets and 1 for alternatives). See the Hymans Robertson
report.
The cost of the scheme in
England, which falls mostly to taxpayers, has almost quadrupled from £1.5
billion in 1997 to 1998 to £5.7 billion in 2012 to 2013.
The market value of the funds at
end of March 2013 was £178 billion; this represents an increase of 13% on
March 2012 and 27% on March 2010.
There were 4.68 million members
of the Local Government Pension Scheme at the end of March
2013.
Call for
evidence
The consultation has been
developed in response to the call for
evidence into the future structure of the Local Government Pension
Scheme.
Contestable policy
fund
As part of this
government’s drive for more open policy making and following a
competitive tender process, ministers appointed pension expert firm Hymans
Robertson to bring forward an assessment of savings opportunities through
increased pension fund collaboration.
The Contestable Policy
Fund was announced in the Civil Service Reform Plan. The Cabinet
Office will act as a secretariat to the process and support departments to
evaluate the effectiveness of the approach and its value for money. The fund
will be overseen by ministers and the process will be underpinned by clear
contracts - setting out criteria to ensure that the policy being developed is
done so in the best public interest and that it does not favour any bias of the
provider.
See more information on civil service
reform.