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Consultancy defends report behind government's pension reforms

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The consultancy Hymans Robertson has defended a report it produced on local authority pensions after it “set fur flying” by recommending major changes to how funds invest.

The Department for Communities & Local Government commissioned the December 2013 report, and has since indicated that, on the basis of the document, local government pension scheme funds should move towards passive asset management and collective investment vehicles, sparking heavy criticism from funds themselves.

However, Hymans Robertson senior partner Ronnie Bowie told last week’s LGC Investment Summit that the firm did not intend to advocate widespread and enforced use of passive strategies. He added that most LGPS funds had consistently underperformed over the long term and had to be improved.

The report aggregated the performance of the actively-managed equity assets within LGPS funds over the decade to 2012-13. It argued that on average, these assets did not achieve higher investment returns than the stock market.

It said: “There are some funds which have performed consistently well relative to their peers. However, for the LGPS taken in aggregate, equity performance before fees for most geographical regions has been no better than the index.”

“Greater use of passive investment for listed equities and bonds could save £230m per year without damaging investment performance in aggregate across the LGPS.”

Many LGPS funds argued that some fuds outperformed the stock market, and that because parts of the report were based on just 18 of the 89 funds, it could not be conclusive.

Pension scheme officers voiced their concern that the DCLG would, on the basis of the report, order all LGPS funds to invest passively, either outright or on a ‘comply or explain’ basis, penalising those funds that had used active assets well and delivered high returns.

Mr Bowie admitted that the report had “set fur flying” within the LGPS community by suggesting that “active management added no value”.

However, he said that over the long term, the majority of LGPS funds were underperforming.

Mr Bowie said more than half of LGPS funds outperformed their benchmarks over the last three years, but over 10 years, just a quarter did so, with 75% either breaking even or underperforming.

He argued that even outperformers had not maintained their high returns. He said that half of the funds that outperformed their benchmarks over 2004-2008 could not repeat the performance over 2009-2013.

“About 20 funds found it difficult to do anything but underperform, and something needs to be done about this,” Mr Bowie said.

Mr Bowie said Hymans Robertson did not advocate forcing LGPS funds to use passive investments only.

However, he said the performance of struggling funds must be improved through better governance processes.

“Those with more governance budget can use alternatives, smart benchmarks and active assets,” said Mr Bowie, “All funds can benefit from collectivism and every fund should use some passive investment.”

He added: “Nobody wants to see 100% passive [investment] but if funds don’t come up with a solution it might be imposed.”

The government has now closed its consultation on the future of the scheme and is due to publish proposals on passive investment and collective vehicles in the autumn.

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