Britain's Local Government Pension Scheme is one of the biggest public pension schemes in Europe, and it wastes far too much money on third-party asset managers. It's time for a radical reform of the system, writes ROBIN POWELL, and we should look to the US state of Nevada for inspiration.
Whatever the rights and wrongs of embarking on HS2 in the first place, few would argue that it hasn’t been a waste of taxpayers’ money. But, for me, there’s another national project which has been even more wasteful, and for far longer, and yet rarely comes in for criticism. I’m referring to the Local Government Pension Scheme.
The LGPS is one of the largest public pension schemes in Europe, managing £359 billion for 6.1 million people across England and Wales. But it’s eye-wateringly expensive for tax payers. As well as employing thousands of people, the LGPS shells out vast sums to third-party consultants and asset managers. According to its latest report, it paid out £1,746,763,000 in fund management fees in the financial year 2022-23. That takes the total to £11,315,000,000 — yes, £11.3 billion — over the last decade.
What’s even more extraordinary is that asset management fees almost doubled in 2022-23, from 26 basis points to 49 basis points. That’s at a time when there’s never been more pressure on fund managers to lower their fees.
Lobbyists have held back reform
I’ve been writing about the inefficiency of the LGPS for more than a decade. I’ve highlighted the excellent work done by Michael Johnson at the Centre for Policy Studies, the Transparency Task Force and Gina Miller’s True and Fair Campaign to shine a light on it.. But it’s been a losing battle. Why? Because managing LGPS assets is awesomely lucrative, and the hugely powerful financial lobby is determined to keep the status quo.
An example of this came in 2014, when a report by Hymans Robertson, commissioned by the Government, recommended that the LGPS should save money by switching from active to passive management. After intense industry lobbying, the Government decided against it, although it did at least persuade local authorities to reduce costs by pooling their investments.
Despite these investment pools, the LGPS remains a bureaucratic behemoth. Michael Johnson, for instance, has been looking into the amount of paperwork it generates. One year of annual fund reports have 8,186 pages between them. Then there’s the Communications Policy, the Funding Strategy, Governance Compliance Statements and the Statement of Investment Principles, which between them come to another 4,670. Valuation reports total another 3,769 pages. That’s more than 16,000 pages for a single occupational pension scheme.
“Perhaps worst of all,” says Johnson, “the reporting avalanche does not provide transparency. A simple example: one fund’s annual report shows a single investment of £250 million, yet, within its 102 pages, there is no clue as to what that asset is. I am beginning to understand how the over-financialisation of our economy is contributing to our nation's lack of productivity.”
How to fix the system
What, then, is the answer? The LGPS should finally do what it was advised to do ten years ago and invest most of its assets in low-cost index funds. Given how large those assets are, it could surely negotiate fees of around five basis points, and possibly lower. It should also resist pressure from the Government to invest in opaque and high-fee private equity funds.
Michael Johnson would like to see a more radical solution. “(The Government) should take all the assets in-house as a sovereign wealth fund, and aspire to build a global centre of fund management excellence, which would be consistent with this government’s ‘productive finance’ agenda. The liabilities would then get a Crown Guarantee and join the rest of the unfunded public sector pension liabilities.
“That aside, given how interest rates and discount rates have risen of late, some of the individual LGPS funds are now running at a surplus, (so now is) a very good time for the Government to take the assets in-house.”
If you’re thinking that sounds dangerously like another costly white elephant, think again, because we have the perfect prototype across the pond. Nevada’s Public Employees’ Retirement System is one of the best-performing state pension funds in America. And, until recently, it’s been managed by , Chief Investment Officer Steve Edmundson, who finally has some company in the state investment office after the appointment of an assistant.
Instead of paying consultants and active managers to try to beat the market, Edmundson keeps things simple and focuses on efficiency and cost control. Apart from modest holdings in property and private equity, the vast bulk of the $53.2 billion he manages is invested in passive equity and bond funds.
Edmundson famously said, when asked by the Wall Street Journal, to describe his daily trading strategy, “Do as little as possible, usually nothing.”
Just think of the fortune UK taxpayers would save if the LGPS took the same approach.
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