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LGPS wastes up to £9bn on ‘unnecessary’ fund managers

Local government pension schemes (LGPS) have been haemorrhaging money to external fund managers and are rapidly running out of cash to meet pensions, a think tank has claimed.

A review undertaken for the Centre for Policy Studies revealed that over the last decade, assets placed in the LGPS have underperformed the major UK and global equity and bond indices, leading the think tank to suggest that passive investment would have earned more.

While the 89 LGPS funds had combined assets of £214bn at the end of the last financial year, a nominal increase of 79% over the last 10 years, the CPS said that up to £9bn may have been lost in “unnecessary, high and recurring” fees to fund managers.

“Over the last decade the assets [in LGPS] have under-preformed the major UK and global equity and bond indices: passive investing would have been more rewarding,” said the writer of the report Michael Johnson.

“The only winner has been the industry, garnering over £4.5bn in reported fees which, as a percentage of asset market value, have more than doubled over the last decade,” Johnson added. “In addition, this paper estimates unreported fees, including performance fees paid to alternative assets managers, to be between £3.6bn and £4.6bn.”

The CPS report also highlighted the wild variance in total annual costs per member of the 89 LGPS funds, with Enfield paying £592 towards the fund in 2015-16 compared to a mere £28 in West Yorkshire.

Johnson said that the LGPS needs to be simplified in a “dramatic” fashion to reduce the differences, with inconsistent local architecture replaced with asset pools and specialist investment vehicles with their own governance committees.

However, Johnson added that asset pooling alone would not be a sufficient measure as the cost-saving anticipated will have “little material impact” on the funds due to the scale of their deficits.

The CPS’s report led Birmingham City Council leader John Clancy to call the waste of LGPS assets “a national disgrace”, saying that the money spent by councils on investment managers could be better spent paying for local services.

The CPS concluded that LGPS fund managers should be paid by performance rather than the size of the fund, suggesting that the government could also use LGPS assets to seed infrastructure-focused sovereign wealth funds for eventual use on transport and future housing projects, as the former chancellor George Osbourne announced in October 2015.

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