The government will force local authority pension funds to pool their investments if they fail to hit agreed savings targets, the summer budget papers indicate.
According to Treasury papers the government will invite local authorities to propose their own plans to meet “common criteria for savings”.
This will be followed by a consultation later this year, setting out “detailed criteria” for savings and “backstop legislation”.
The aim of this proposed law is to “ensure that those administering authorities that do not come forward with sufficiently ambitious proposals are required to pool investments”, the papers add.
GMB national secretary Brian Strutton, who is also chair of the Local Government Pension Scheme Advisory Board’s cost management committee, condemned the Budget announcement.
“I’m surprised that government has chosen to take an inflexible approach toward LGPS fund investment structures which may well increase costs to employers and is also likely to undermine much more important reform objectives,” he added.
Joanne Segars, the chief executive of the National Association of Pension Funds (NAPF) and chair of the LGPS Advisory Board, said pooled investments would work most effectively “where they arise out of natural collaboration between funds rather than where funds are forced to invest together”.
She added: “The NAPF and its LGPS member funds will engage constructively with the government on this initiative.”
John Hanratty, consultant at pensions law firm Nabarro, said the government’s stance on pooled pension funds could be linked to a push for infrastructure funding.
As the move appeared to come from the Treasury - rather than from the Department for Communities and Local Government – it pointed towards an attempt to push pension funds to invest jointly in infrastructure projects on a regional basis.
He added that the government may make infrastructure investing more attractive to LGPS funds by reforming the investment regulations or by making it easier for pension funds to set up special investment vehicles through which they could invest in infrastructure.
Current rules restrict investment in some asset classes.
John Wright, head of public sector at consultancy Hymans Robertson, said efforts should focus on “ways of improving outcomes for poor-performing funds without destroying good performance achieved by others.
“Funds are already working individually and collaboratively on delivering savings; negotiations on fees, joint procurement of managers, shared administration, pooling investment resources and the CIV for London funds,” he added.
“Further encouragement to develop these approaches more widely and more systematically across the LGPS will deliver big benefits.”
“Some significant benefits can be delivered in the short term with savings in manager fees already emerging.
“But other equally significant benefits will take longer to deliver such as developing and implementing more efficient and cost effective approaches to infrastructure investment and other alternative asset classes.
“With this direction from government, the LGPS can build on good work done by LAs to date and demonstrate how greater efficiency, further cost savings and better overall performance can be delivered.”
Timeline: LGPS cost saving
The Summer Budget announcement comes after a protracted process of calls for evidence and consultations on reducing investment management costs in the Local Government Pension Scheme (LGPS).
In May 2013 the government launched a call for evidence on cost saving, hinting at the potential for merging the 89 LGPS funds into fewer separate pots.
A year later, in response to the call for evidence submissions, the government said it would not take its proposals to merge funds any further, and launched a formal consultation on cost saving.
Its main proposals in the 2014 consultation were: greater use of collective investment vehicles; better deficit management; and possibly forcing funds to use mainly passive investments.
Local authorities universally panned the 2014 proposals, calling the plan to enforce use of passive investments “bizarre” and criticising the research on which the proposals were based.
The government pledged to publish its final proposals for reform in autumn 2014.
However, in December 2014 it said further announcements would not be made “until the new year”, after which no further announcements have been made until now.