The director of Lancashire Pension Fund and the chief executive of the London Collective Investment Vehicle (CIV) have welcomed the Treasury’s Local Government Pension Scheme (LGPS) announcements, but urged the government to be flexible in its approach to reform.
The Budget document, published on Wednesday, included plans to invite local authorities to put forward their suggestions for agreed efficiency targets for the LGPS and to create a requirement for LGPS funds to pool some investments if they fail to meet the targets.
Both George Graham, director of the £5bn Lancashire fund, and Hugh Grover, chief executive of the CIV, told LGC they had received a call from the Treasury to discuss the plans after chancellor George Osborne delivered the Budget on Wednesday afternoon.
Mr Graham (pictured) said that the new measures were “the government saying, ‘get your act together or we will intervene’”.
However, he said that the Treasury is “open to dialogue” and that the LGPS is “in a much better position” in its negotiations on reform now than it was in 2013, when the government strongly favoured forcing all funds to merge.
Mr Graham said: “This appears to be a localist solution, where we come up with the solutions. Downward pressure on costs is not a bad thing, although an obsession with costs is.”
Mr Graham said that reducing costs via pooling investments, as the Lancashire fund and the London Pension Fund Authority (LPFA) did in a deal in December, is the only option for making large efficiencies, although he warned that requirements to pool assets should not be too prescriptive.
“Our partnership with LPFA will knock 10-15% off costs. Funds need bargaining power [in respect of investment management fees] and you only get that through some sort of asset pooling.
“We want to talk in more detail about how we set the [savings] targets and about pooling because there is more than one way to do it.”
Mr Graham added that the government’s proposal to force all LGPS funds to invest primarily in passively-managed stocks was “off the table”.
He told LGC he expects the government to revise the LGPS investment regulations after the summer recess to make pooling easier. He said Lancashire will also propose a “more prudential regime” for regulating the amount LGPS funds may invest in certain asset classes such as private equity, to place council funds on an equal footing with private sector pension funds in terms of investment capability.
Hugh Grover, chief executive of the London CIV, agreed that pooling in some form will bring efficiencies for smaller funds.
“There is no doubt that scale brings economy,” said Mr Grover, referring to the CIV’s work with small London funds on bargaining with investment managers.
“Whether some of the big funds can argue that they already have sufficient scale and efficiency, I don’t know.”
However, Mr Grover also cautioned the government about any prescriptive pooling requirements.
“I don’t for a moment suggest that the London CIV route is the only route,” he said.
“The government must leave it flexible enough so that different authorities can put in place the right solutions [for pooling].
“We must keep a close eye on the document and the criteria set out. Across the LGPS we want to see what is in the framework for the government deciding an authority hasn’t gone far enough, and then what happens.”