LGC’s commentary on council pension pooling plans
DCLG disappointment of the day: Department accused of ‘failing’ its responsibility to fund fire safety works
Care conundrum of the day: NHS push to recruit domiciliary care staff ‘threatens wider care system’
Today’s top comment: Stephen Houghton on business rates
A glance at the Department for Communities & Local Government’s original intentions for Local Government Pension Scheme reform and the current state of play is illuminating.
Originally, the government made noises about forcing funds to fully merge into five or three larger funds (or even one). Following an outcry from the sector, it changed tack, focusing on the cost of active investment. All passive investment could be done through a single shared platform, it said, and active investment should only be made if funds could prove the higher fees for these really did secure better performance.
Again, funds revolted. Revising its views once more, the government invited funds to put forward proposals to form asset pools of around £30bn for Treasury and DCLG approval. This figure then fell to £25bn. Neither the Welsh pool, nor the Local Pensions Partnership, have hit this value – but the government has allowed both to continue developing.
A red-line issue for the government now is that all funds’ assets are invested “via the pool”, apart from in exceptional circumstances – so, the great majority of investment should be done via the pool. The government did not want to see funds treating their pools as just another option to buy into.
But now, even this part of the government’s plan may not come to pass.
LGC reported exclusively today that funds and asset managers anticipate an exemption, at least in part, on pooling passive assets held in life funds. There are a number of reasons for this, not least that groups of funds could negotiate better rates on these investments without moving them into pools (some have done so already). Funds await further instruction from DCLG on the issue.
If ministers allow funds to continue investing in passive life funds outside of pools in some way, this will mean around a quarter of the LGPS’ total assets will stay outside of the pool.
Then, there is the question of infrastructure. There are a number of practical issues to resolve around collective infrastructure investing, not least which organisation will coordinate this and whether there are suitable investments available. But in any case, LGPS funds are tied into their current infrastructure holdings for set time periods, so the government has said it does not expect funds to pull out of these early in order to enter pooled infrastructure investments.
There is also uncertainty over how the government will levy stamp duty on property assets that funds transfer into pools. Until this is resolved, property too may stay outside pools for some time.
There is no doubt that there was inefficiency in the LGPS as a result of its structure – even though the fragmented nature of the scheme was necessary for political accountability. Gathering into groups to negotiate better prices from managers of certain areas was both possible and desirable. But it is becoming ever-more apparent to those outside the scheme that there is no quick fix. Pooling is necessarily complex – and may take far longer than the government ever anticipated.