The Local Government Pension Scheme, which has spent over £4.5bn on reported feed yet underperformed the major UK and global equity and bond indices over the last decade, should be nationalised by Government, the Centre for Policy Studies has found.
The report finds that reported fees, which do not include under-the-bonnet fund management costs not explicitly reported, have more than doubled as a percentage of asset market value in the decade to 31 March 2016. The report finds wide differences in total annual costs per member, with the Enfield scheme costing £592 per member in 2015-16, 21 times more than West Yorkshire’s £28 per member.
The report’s author, CPS fellow Michael Johnson says the Department for Communities and Local Government, as scheme sponsor, should discipline the funds’ internal audit functions and consider suing their external auditors to recover fees paid.
The report sets out a number of proposals, including a mass switch out of actively managed assets into passives, exiting all fund of funds investments and a more extreme consolidation than the pooling already under way with funds moved into three much larger pools from 2023.
It also calls for the Government to de-fund the LGPS, take on its liabilities, and use the assets to invest in housing. LGPS pensions would then be paid on a pay-as-you-go basis by central Government.
Johnson says DCLG should force the Local Pension Partnership, which comprises the Lancashire County Pension Fund and the London Pension Fund Authority and has assets of around £11bn, to merge with another pool to meet the £25m threshold set by Government.
Johnson says LGPS funds should be encouraged not to engage with any fund manager whose fees are tied to the size of the assets under management, and fees should be predominately performance-driven.
He also calls for the repeal of Section 36(3) of the Pensions Act 1995, which requires trustees to take advice prior to making an investment and says the DCLG should tie LGPS investment consultants’ remuneration to asset out-performance relative to indices, or strongly discourage them from using investment consultants.
The report says the combined assets of the 89 funds increased by a nominal 79 per cent over the decade to 31 March 2016, to £214 billion at 31 March 2016, the date of each fund’s triennial actuarial valuation of liabilities. Results have yet to be made public, but KPMG estimates a combined deficit, or funding shortfall, of £70bn, equivalent to an overall funding ratio of 75 per cent. This, calculates Johnson, equates to a £23bn increase on 2013’s deficit of £47bn, with a funding ratio of 79 per cent. The report quotes KPMG as saying that the deficit will have subsequently increased to over £100bn at year-end 2016.
Johnson says: “Over the last decade the LGPS’s assets have under-preformed the major UK and global equity and bond indices: passive investing would have been more rewarding. The only winner has been the industry, garnering over £4.5 billion in reported fees which, as a percentage of asset market value, have more than doubled over the last decade. In addition, this paper estimates unreported fees, including performance fees paid to alternative assets managers, to be between £3.6 billion and £4.6 billion.
“The Government should develop a parallel plan to de-fund the LGPS and use the assets to seed a sovereign wealth fund, with a significant allocation to infrastructure. As a quid pro quo, a Crown guarantee could be provided on the pension promises, which would subsequently be met on a pay-as- you-go basis.
“A Crown guarantee would be merely making explicit a practical reality, but the unfunded liabilities would have to be reported in the Whole of Government Accounts.”