Government’s reform agenda leads to more collaboration between local authority funds

The government’s reform agenda for the Local Government Pension Scheme (LGPS) is leading to more collaboration between local authority funds, as they seek ways of reducing costs.

Since its first proposals for mandatory use of passive investment two years ago, the government has pushed for LGPS funds to reduce investment costs. In the summer, the government announced consultation on the use of pooled investment vehicles for LGPS assets and at the recent Conservative conference, Chancellor George Osborne said the LGPS funds should form six “British wealth funds” with assets of £30 billion or more each.

As a result of the impetus the government has put into collectivisation, seven Midlands LGPS funds, led by Cheshire and Staffordshire are understood to be merging their passive equity investment mandates in order to cut costs. It has also been reported that Surrey, Cumbria and the East Riding of Yorkshire funds are in talks over a £9 billion investment partnership and that the combination of the London Pensions Fund Authority and Lancashire is seeking approval to win third-party investment mandates.

The proposed collaborative arrangements have been given greater urgency by the tight timetable from central government. It is expected that criteria for pooled arrangements will be announced in November, with LGPS then expected to announce their chosen groupings as early as February 2016. This would give each LGPS fund around three months, including the Christmas period, to consider its options, agree who to collaborate with and then define a single governance body to make investment management decisions.

The benefits of simply pooling assets to create cost savings has been questioned by some experts, who point to studies showing that superior investment performance stems from good governance, mainly through large internal resources and a board level focus on strategy.