Local government minister Brandon Lewis is facing criticism from council pension managers over the government’s plan to push local authority schemes towards passive investment.
The Department for Communities & Local Government issued a consultation earlier this month proposing to create collective investment vehicles (CIVs), and in particular, a vehicle that would allow local government pension schemes to reallocate their investment from actively managed assets into similar, passively managed assets.
Passive funds are structured to mimic the performance of stock markets. They are considered cheaper in terms of fees than active management, where investment managers select stocks using different methods.
A DCLG-commissioned report by actuarial firm Hymans Robertson said LGPS funds spent £790m per year on investment management fees, and that by moving to cheaper passive funds, they would save £660m of this.
However, council pension experts took Mr Lewis to task over the government’s emphasis on passive investment as he took questions from the floor after he spoke at the National Association of Pension Funds local authority conference in Cirencester this week.
Jonathan Hunt, pensions and treasury director at the London tri-borough, said the Hymans Robertson analysis “penalised funds that had done well” by “lumping together” the investment performance of the fund as a whole, masking those funds that had outperformed investment targets through an active strategy.
There were also criticisms from the conference floor that the report had analysed the investment performance data of just 18 of the 89 LGPS funds and so could not be conclusive.
Surrey CC finance manager for pensions and treasury Phil Triggs said: “The [consultation] paper concentrates on cost reduction and not the facets of making a good fund. Good governance leads to enhanced performance but it does come with a cost. We are having our wings cut by the focus on cost reduction.”
West Yorkshire Pension Fund director Rodney Barton added: “We have a 20-year record of internal, actively managed outperformance. We will lose a lot of this through enforced passive investment.”
Lancashire CC pension fund manager Trevor Castledine said that if most LGPS funds accessed a passive strategy via a CIV “all of the funds would be invested in the same thing”, opening them up to the “systemic risk” of a particular market crashing.
In response Mr Lewis said: “We have to look at the LGPS as a whole, but we are keen to learn lessons from those who have done well.
“I welcome funds making the case to us to back [active management] up. The figures currently show that passive is better.
“If everyone who said their active strategy was outperforming was telling the truth, why do we have deficits?”
Defending the scope of the Hymans Robertson report, Mr Lewis said: “There is an argument that information we have comes from the better funds, so we could be underestimating the savings that could be made.”