LGPS: Has pooling saved costs?
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Local Government Pension Scheme pools have been set up to save costs for funds, local authorities and beneficiaries, but how well are they doing in this – and is there more to it than negotiating down fees?
Brunel Pension Partnership may have become the first pool to state that the pooling process has led to cost savings.
Its latest annual report “demonstrates the benefits of pooling with annual savings of more than £34 million and increased opportunities for stewardship, diversification and climate analysis”, chief operating officer Joe Webster wrote at the end of last month, highlighting that “by reducing investment costs, including using its greater scale to negotiate better fees from fund managers, considerable tax and other savings have been made over the course of the year for Brunel’s client funds. For example, the Property Fund has saved several million pounds already.”
How do large funds get costs down?
Pooling was announced by David Cameron’s government back in 2015 with the aim of reducing investment costs through benefits of scale, allowing collective investment in assets like infrastructure, as well as use of passive investing. Since then, the local government sector has regrouped assets at an eye-watering scale.
But the exercise incurred set-up costs, and the question of whether or when these would be recouped has often been avoided, with those involved wary of commenting publicly in what is a highly politicised part of pensions. Relatively recently, the consensus appeared to be that it would take several years before one could say if pooling has been a success.
Negotiating power alone might however not be sufficient to reduce costs. While larger funds can bring fees down, their ability to invest in higher fee asset classes in private markets pushes costs up again. John Simmonds, principal at CEM Benchmarking, has previously said that “negotiated reductions in manager fees are more than offset as funds increase their allocation to private assets - costs in absolute terms go up”.
The tendency of large funds to outperform smaller funds is down to cost, he says, but “whilst larger funds tend to invest more in private markets, they implement their strategies more efficiently” - advising the LGPS to learn how to do so. The key are not manager fees but moving to in-house management and avoiding multi-layered funds, he argued.
