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Local government pensions reforms backed – but not fund mergers

The DCLG will not press ahead with plans to merge the 89 Local Government Pension Scheme (LGPS) funds, but it does believe better management could lead to substantial savings over the next decade. 

Following a review of the LGPS by pension experts Hymans Robertson, the consultation outlined two elements which could save taxpayers around £660m. The report also revealed that the cost of asset management across the scheme in 2012 was £790m, much higher than previously thought. 

Recommendations include moving to a passive management of listed assets like bonds and shares, accessed through a common investment vehicle; this could save £230m annually by cutting investment fees and a further £190m by reducing transaction costs. 

Additionally, it has been suggested that using a common investment vehicle to invest in alternative assets, ending the use of high cost ‘fund of funds’ arrangements, such as hedge funds, private equity, property and infrastructure, could save £240m a year. The report states that ‘fund of funds’ introduce an additional layer of fees, increasing the total cost of investment, but by setting up a  common investment vehicle this would help funds achieve the scale required to invest,  without the high costs associated with a ‘fund of funds’. 

Pensions secretary Brandon Lewis said: “Under the last administration, the cost of town hall pensions almost quadrupled to nearly £6bn, diverting taxpayers’ money from emptying bins, cleaning the streets and keeping Council Tax down. 

“This government is taking action to reduce the massive and unsustainable cost of state sector pensions. The proposals I am setting out will help reduce investment costs by £660m a year. For the first year in recent memory, the cost of town hall pensions to taxpayers is now falling.” 

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