A review of the Local Government Pension Scheme by actuaries Hymans Robertson has concluded that as much as £660m could be saved through reforms to its asset management regime, including greater use of common investment vehicles
The examination, which was commissioned by government to evaluate reforms to cut the cost of the LGPS, concluded that the cost of asset management across the scheme in 2012 was £790m.
Hymans Robertson was asked to assess potential ways to cut these costs, including mergers of existing LGPS schemes, as part of a government call for evidence on possible reforms.
The report concluded two main alterations could eventually save as much as £660m a year if introduced over ten years. Moving from an actively managed fund management approach for listed assets like bonds and shares to a passive arrangement through a common investment vehicle for funds would eventually save £230m in investment fees and a further £190m in lower transaction costs.
According to the report, the current active management regime employs a professional fund manager or investment research team to make discretionary investment decisions on its behalf. A passive approach typically invests assets to mirror a market in order to deliver a return comparable with the overall performance of the market being tracked, with less hands-on decision-making.
In addition, Hymans Robertson called for the creation of a common investment vehicle to invest in alternative assets, such as infrastructure projects, hedge funds, private equity and property. This would save £240m a year.
However, the report concluded that although significant savings could be realised by amalgamating the current funds into five, merger could take around 18 months longer to implement than common investment vehicles, meaning there was a significant reduction in the net present value of savings over 10 years.
John Wright, head of public sector pensions at Hymans Robertson, said the changes represented a potentially defining moment for the LGPS.
'A year ago we had little consistent, reliable data on what it costs to manage LGPS investments,' he said.
'There was therefore no clear diagnosis of the real problems and a serious risk of jumping to the wrong conclusions about areas with the greatest potential for cost saving and the most appropriate options for structural reform.
'Against the backdrop of poor information, full-scale merger of funds seemed the likeliest route - but now the story is different. Collective Investment Vehicles are now the government's leading option in this consultation. These vehicles can deliver investment scale benefits across the LGPS faster than merger. They also make it possible to preserve the local accountability and decision making that would be lost by merging funds.'
Linda Selman, head of LGPS investments at the firm, added the evidence shows funds have already negotiated hard with their fund managers to drive fees down and deliver good value for money to members.
'Larger pools of assets using Collective Investment Vehicles might allow LGPS funds to drive fees lower.
She added that active management could still have an important role to play, but should be deployed only when it adds value.
'Ultimately, the balance between passive and active should depend upon the fund's governance budget, investment beliefs and objectives, and the expected net of fee returns,' she added.
'We expect to carry out further research on the role of active management for the LGPS as part of our response to this new consultation.'