William Eichler 17 February 2016

Pension scheme reforms to help drive down costs

Government proposals to reform the Local Government Pension Scheme (LGPS) will help drive down costs, achieve better investment outcomes and stimulate new infrastructure investment, says a new report from BNY Mellon.

The investment management and services company has submitted a report, entitled LGPS Pooling: The Collective Good?, as part of the Government consultation on reforming the LGPS, which has been described in the past as a ‘national embarrassment’.

The report is broadly supportive of the Government’s reform proposals--which could see the LGPS save up to £660m a year--but it highlights a number of potential problems.

BNY Mellon raises concerns over the way LGPSs’ assets are pooled. Individual local authorities, they say, may place the entirety of their investments in a single pool in order to achieve economies of scale.

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 report also points out the significant risks of a mass switch from active to passive management.

Paul Traynor, international head of Pensions and Insurance Segments at BNY Mellon, warned: ‘LGPSs shouldn't move into passives and hope for the best.’

He continued: ‘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.’

The report also recommended a robust governance structure relating to the decision-making process for infrastructure projects.

At the same time, according to BNY Mellon, the expertise of existing LGPSs should be harnessed.

Some individuals within local authorities with expertise in the management of pensions should be allowed to 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.

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