National Association of Pension Funds chief executive: We recommend against the mandated use of passive management
Reform of the local government pension scheme is continuing apace. Earlier this month, the National Association of Pension Funds submitted its response to the Department for Communities & Local Government’s consultation – LGPS: Opportunities for Collaboration, Cost Savings and Efficiencies.
The consultation proposes a number of ways the LGPS can deliver good outcomes for participating employers, local taxpayers and scheme members, and while we fully support this objective, we argue that purely focusing on how to reduce costs is narrow sighted.
The NAPF agrees that significant cost savings can be made by using passive investment strategies and collective investment vehicles, but while these savings have the potential to be substantial, they represent only a small proportion of the scheme’s £47bn deficit.
Instead of this approach, we recommend the government focus on identifying good and bad performance within the LGPS at a fund level and to raise standards among poorly performing funds through targeted regulatory interventions.
One of the government’s key proposals in the consultation is that LGPS funds should be moved from active to passive management to reduce costs. Unquestionably, on average, passive styles can be delivered at a lower cost than active, but alternative changes in investment style may also yield significant cost savings.
So given the potential to achieve similar levels of savings through the use of internal management, as shown by NAPF analysis, and the wider potential consequences of moving all LGPS listed assets to passive, we recommend against the mandated use of passive management. Instead we argue in our response that a ‘comply or explain’ approach should be adopted and regularly reviewed.
We also believe that investment in one type of CIV should not be compulsory and that funds should have the flexibility to look at alternative ways of investing collaboratively.
While there’s a risk of over-prescribing a solution there’s also a risk of too many alternative solutions developing and undermining the scale and expertise necessary to drive cost and performance. As such our consultation response asks the government to lay out a clear framework for the development of these collective investment structures.
Inevitably, these reforms may require the revision of LGPS regulations and the government should be prepared to make the necessary changes to enable the development of well-governed CIVs that meet local authority funds’ aims and objectives.
The LGPS is undergoing a significant amount of change and these reforms are too important to rush and make mistakes. It’s crucial that the government sets out a clear and reasonable timetable for reform after the general election in May 2015.
Joanne Segars, chief executive, the National Association of Pension Funds