The London Pension Fund Authority (LPFA) has hit back at a government consultation that recommends UK local government pensions switch £85 billion of assets from active to passive investments.
In May, the Department for Communities and Local Government issued a consultation document to the 89 pension funds attached to councils across the UK proposing they use solely passive management. Investment consultant Hymans Robertson, which conducted an analysis on behalf of the government, said pension funds could save as much as £420 million a year by moving to passive management.
“Everyone who I have talked to thinks it’s mad,” said LPFA Deputy Chair Sir Merrick Cockell. In its response to the consultation, the LPFA said the government had “wrongly prescribed a narrow solution” to the need for reform, and criticised Hymans Robertson’s report for using a “problematic” definition of active management.
“Many of the active mandates considered are perversely incentivised, either explicitly or as a consequence of frequent review, to outperform a market cap index over the short term,” the LPFA said.
“In the context of a long-term pension fund investor with the liquidity advantages of the [Local Government Pension Schemes], high conviction, low-turnover strategies… can deliver long-term real growth superior to the wider index.”
Sir Merrick Cockell, deputy chair of the LPFA, was quoted by the Local Government Chronicle as saying the proposals were “mad” at a Local Government Authority conference last week.
“Everyone who I have talked to thinks it’s mad,” Cockell said. “It’s actually attracting us to the worst performers. It’s dragging down our performance. Every pension fund has a passive element in it but personally I think we should be actively investing.”
He added that investment decisions “should be taken by those with the skills and expertise, not politicians”.
The government has also proposed using common investment vehicles for pensions to co-invest in individual asset classes, but the LPFA rejected this.
In its response the LPFA instead recommended a collective asset and liability management (ALM) process for local government schemes “to reduce costs and give direct access to classes of investment like infrastructure and housing, which better match fund liabilities”.
The authority said this approach—which the LPFA is already taking steps to create—would improve the pensions’ chances of eliminating their deficits in the long term while also delivering the same economies of scale targeted by the government’s proposals.
“Local funds should be able to choose to delegate their asset allocation decisions to the ALM partnership,” the authority said. “In return they would have representation on the partnership’s board and hold the partnership to account for its performance through the administering authority’s pension committee.
“The partnership would determine asset allocation for each fund based on a clear understanding of each fund’s liabilities, driving up data quality to do so. This is effectively pooling funds to allow scale benefits whilst retaining local accountability.”
The National Association of Pension Funds (NAPF) has also attacked the “narrow vision” of the government’s proposals as the potential savings “represent only a tiny proportion” of the total £47 billion deficit across the UK’s local government pensions.
Joanne Segars, chief executive of the NAPF, said: “The government is mistaken in thinking the LGPS can be treated as a homogenous whole when it is comprised of 89 different funds, some of which already perform extremely well. A subtler and more intelligent approach than that outlined by the government is required if we are to ensure funds with good performance are not hamstrung to help those that perform poorly.”
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