Groundhog Day – is merging the London LGPS funds a good idea, again?

Written By: David Crum Director 330 Consulting

The concept of merging the London LGPS funds has been voiced in public – again – and it left me wondering why, if it is indeed a sensible and cost-effective thing to do, it hasn’t been done already. The answers, I suspect, are that, firstly, it’s not that simple to do. Secondly, no one really wants to do it. And thirdly, no one has actually carried out a detailed cost/savings analysis of the pros and cons of the proposal.

My view on merging funds is clear: I very firmly believe that it would be the wrong thing to do, resulting in a less than optimal outcome – dismantling a system that, for the most part, works very well, and would provide an unnecessary distraction for the LGPS at an important point in its on-going development and reinvention.

Shock horror, I hear you say – LGPS consultant supports the continuation of a system that provides him with a large number of potential clients, versus the creation of a much smaller pool of buyers of his services! Well, yes, that’s one interpretation. However, as an ex-LGPS Officer, and as someone with some integrity (I hope), there are two main thoughts behind my position, rather than it being driven by simple self-interest:

1. The methods for reducing costs already exist – the public procurement process has always given administering authorities the tools to undertake competitive tendering exercises for the services required for the running of LGPS funds. Only relatively recently, post-Hutton, has collective purchasing come into the wider view.

2. The current system works – if it ain’t (badly) broke, don’t fix it. Locally elected Councillors have control of their local pension fund, and can take decisions that are relevant to their position. Whilst I believe that there is room for improvement in the governance arrangements of many LGPS funds, the existing setup is fit for purpose.

The main driver behind the promerger argument seems to be cost, and stems from the view that individual procurement exercises undertaken by individual LGPS funds, by definition, are unable to benefit from economies of scale, and result in relatively expensive services being purchased. Framework Agreements (FAs) – the latest buzz phrase in the LGPS space – appear to be the solution, as they provide the opportunity for cooperation between likeminded funds in organising “bulk buying”.

So, I believe the tools and options to reduce costs for the London, and indeed all, LGPS funds already exist. FAs are the main part of the solution, and I hope as their use continues to roll out over the LGPS sector that most funds’ key asset classes will be covered by such agreements. By that I mean I would hope to see countrywide FAs in place within the next two years covering the procurement of the following services: Actuarial, administration & benefits, and investment consultancy (some work has been done in this area already), Custody, Transition managers, Passive equity and bond investments, UK commercial property, Unconstrained Global Equities

If these services were covered by FAs, then I believe roughly 70% of the average LGPS fund’s investment assets would be “in-scope”. This would benefit funds in three main ways:

1) Asset management, custody and consultancy costs would fall as a result of bulk buying, and these lower costs would be accessible by all LGPS funds

2) There would be a much simpler process in place to appoint, and replace, service providers – keeping all of “us” on our toes, and enabling funds to act decisively when necessary, not being put off by protracted procurement timescales for securing replacement services

3) Time would be freed up, with no lengthy procurement exercises needed on funds’ core assets. This time could then be “reinvested” in other areas – for example, in exploring alternative investments, being more active on Environmental, Social or Governance matters, or enhancing fund governance arrangements.

Einstein also said, “I never think of the future – it comes soon enough”. I believe that the future of the LGPS will continue to be as challenging as its recent past, and that Officers and Elected Members don’t need to have additional, unnecessary, workload placed on them at this time.

Let’s give frameworks a chance.