(May 2, 2014) — Active managers could find themselves with £85 billion fewer assets as the UK government has proposed a range of ways for local authority pension funds to move entirely to passive strategies.
The Department for Communities and Local Government has issued a consultation document to the 89 pension funds attached to authorities, along with some employers and associated organisations, explaining a range of changes it may make to the way they invest.
The exercise covers assets approaching £178 billion, of which £85 billion are held in actively managed funds, according to the centre-right think tank the Centre for Policy Studies.
The impetus behind the move is to create more cost-efficient vehicles that in turn are less burdensome on the UK taxpayer, who ultimately foots the bill.
Investment consultants and actuaries Hymans Robertson assisted in a call for evidence conducted by the department, which led to four proposals being made. Several of the proposals have different levels at which they could be applied.
Firstly, funds have been asked to consider common investment vehicles. A previous discussion on merging the funds’ assets and administration functions has been put aside for the moment. Funds must decide whether they agree with the coinvestment approach, how many of these vehicles there should be, and if they concur with the suggestion that asset allocation decisions should remain with each investor’s proprietary teams.
However, the major change could come in the push towards passive management of listed investments, the argument for which has been strengthened by an exercise carried out by Hymans Robertson.
The consultants considered the performance (gross of fees) of equities and bonds in aggregate across the Local Government Pension Scheme (LGPS) over the 10 years to March 2013. They found there was “no clear evidence that the scheme as a whole had outperformed the market in the long term,” and “concluded that listed assets such as bonds and equities could have been managed passively without affecting the scheme’s overall performance”.
In their report, Hymans Robertson quantified the fees savings achievable from moving to passive management of listed assets as £230 million per annum, assuming that all funds participated. Adding in turnover costs, the consultants found the savings could reach £420 million a year.
Therefore, funds have been asked to choose one of the following options:
Funds could be required to move all listed assets into passive management, in order to maximise the savings achieved by the scheme.
Alternatively, funds could be required to invest a specified percentage of their listed assets passively; or to progressively increase their passive investments.
Fund authorities could be required to manage listed assets passively on a “comply or explain” basis.
Funds could simply be expected to consider the benefits of passively managed listed assets, in the light of the evidence set out in this paper and the Hymans Robertson report.
The document also asks funds to consider collective frameworks for more efficient procurement across their sector. Several such frameworks have already been launched for custody, actuarial, and investment consulting services.
The consultation will last for 10 weeks, having opened on May 1 and closing on July 11, 2014. Enquires and responses should be sent to Victoria Edwards at LGPSReform@communities.gsi.gov.uk or by calling 0303 444 4057.
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