LONDON, 17 February, 2016 – The UK Government’s proposals to reform the Local Government Pension Scheme (LGPS) will help drive down costs, achieve better investment outcomes and stimulate new infrastructure investment, according to a new report from BNY Mellon, a global leader in investment management and investment services.
In 2014, the Government launched a consultation process on its far reaching proposals to reform the LGPS, one of the largest defined benefit schemes in the world with over four and a half million members. The LGPS could save up to £660 million a year according to the Government’s consultation document1. BNY Mellon has submitted its report LGPS Pooling: The Collective Good? as part of the consultation process which closes on 19 February, 2016. While broadly supportive of the proposals, the BNY Mellon report highlights that the way pooled assets are structured could stifle competition. It also points out the significant risks of a mass switch from active to passive management, and recommends a robust governance structure relating to the decision-making process for infrastructure projects.
“It is clear that economies of scale can be achieved by pooling the 89 schemes in England and Wales into larger pools,” said Paul Traynor, International head of Pensions and Insurance Segments at BNY Mellon. “But the Government needs to give LGPSs more guidance over how the pools will be structured. This will remove the cost of multiple organisations seeking professional clarification as to which type of scheme should be adopted.”
BNY Mellon’s report challenges the Government’s proposals which advocate that LGPSs should increase their use of passive management because of lower management costs.
“The proposals confuse price and value. Active management is worth paying for,” according to Traynor. “The last decade has shown how volatile investment markets can be, and the future looks no less uncertain. LGPSs shouldn’t move into passives and hope for the best. For long-term investments such as pension funds, active managers aim to lessen the impact in a market downturn and beat the index in a rising market to obtain more long-term value than those who simply seek to track the index.”
Currently just one percent of the LGPS is invested in infrastructure and the Organisation for Economic Co-operation and Development (OECD) estimates that annual infrastructure investment of three and a half percent of GDP is necessary in developed economies2. The OECD states that without this investment there would be detrimental ‘implications for living standards and quality of life’. A growing population, low interest rates and an ageing infrastructure support the Government’s proposals for more LGPSs to invest in infrastructure, according to BNY Mellon’s report.
“Infrastructure investment is critical to the nation’s economy, fuelling jobs and boosting economic growth,” adds Traynor. “The Government’s proposals advocate six LGPS pools and this seems sensible. However from an infrastructure perspective, limiting it further to two or three pools with portfolios in excess of £6 billion would create even more synergies, allowing them to access a wider range of infrastructure opportunities. However the LGPS shouldn’t be seen as an easy way to plug the nation’s funding gap. Infrastructure investment is not without risk. It’s complex, relatively costly to manage and carries a range of unique risks not present in other asset classes − construction risk, political risk and reputational risk, to name but a few.”
The BNY Mellon report also recommends the following:
Competition between pools is essential. Individual local authorities may place the entirety of their investments in a single pool but they should be free to use sub-funds from other pools for different parts of their portfolio if their investment strategy demands it.
The expertise of existing LGPSs should be harnessed. Some individuals within local authorities with particular areas of expertise in the management of pensions may transfer employment to become employees of the pools, where they will be able to develop their skills through specialisation, facilitated by working on larger asset pools.
To view the report, LGPS Pooling: The Collective Good? please click here.
Notes to Editors
BNY Mellon is a global investments company dedicated to helping its clients manage and service their financial assets throughout the investment lifecycle. Whether providing financial services for institutions, corporations or individual investors, BNY Mellon delivers informed investment management and investment services in 35 countries and more than 100 markets. As of December 31, 2015, BNY Mellon had $28.9 trillion in assets under custody and/or administration, and $1.6 trillion in assets under management. BNY Mellon can act as a single point of contact for clients looking to create, trade, hold, manage, service, distribute or restructure investments. BNY Mellon is the corporate brand of The Bank of New York Mellon Corporation (NYSE: BK). Additional information is available on www.bnymellon.com. Follow us on Twitter @BNYMellon or visit our newsroom at www.bnymellon.com/newsroom for the latest company news.