Brandon Lewis, Minister for Local Government, issued a call for evidence on the future shape and size of local government pension funds.
Speaking at the National Association of Pensions Funds’ Local Authority Conference, Lewis questioned whether the existing structure of local authority pension schemes in the UK is fit for purpose. Today there are 89 funds in England and Wales administering schemes on behalf of some 4 million members and investing over £150 billion on their behalf.
The call from the Minister is strongly supported by the London Pensions Fund Authority (LPFA), one of 34 bodies administering pensions in London alone. LPFA has long supported pooled funds, citing significant potential savings in administration and fees, as well as improvements in investment returns from consolidating funds.
The benefits of scale of pooled funds are clear with academics, pensions professionals and advisers internationally citing huge potential savings. Lower fee rates would be accessible for externally managed investments due to larger investment mandates, and economies of scale in pensions administration. Estimates of additional investment returns range from 0.5% to 1% per annum, equating to up to £1.5bn of addition returns a year across local authorities in England and Wales. Savings would also be achieved from economies of scale by merging scheme administration, the maintenance of scheme member records and the payment of benefits.
In addition pooled funds allow for more sophisticated techniques and technology for hedging away risk including interest rate movement and inflation, while a larger pool of assets under management would improve the scope for a more diversified approach through investing in a wider range of asset classes. Larger funds have the resource to pursue more complex liability-driven investment strategies and increase the potential to invest in assets which link well to the long-term focus of pension funds, with better liability matching dynamics, such as infrastructure. Many public sector funds are not effectively ensuring assets and liabilities run together, with assets falling more slowly than liabilities over time.
Academic publications have repeatedly highlighted the “governance dividend” attributed to larger schemes, having higher standards of expertise, advice and governance. In addition, creating superpools would open up the way to up to billions of pounds worth of housing and infrastructure investment across the UK, which might otherwise not take place, creating jobs, boosting local economies and improving the country’s infrastructure.
The Minister expects to make a decision around Christmas this year.
