Advisor warns pension pools over sub-fund closure costs

The costs of closing sub-funds mean Local Government Pension Scheme pools must be extremely careful before launching them, delegates at a Room 151 pensions investment conference heard.

John Harrison, an adviser to LGPS pool Border to Coast told delegates to the LGPS Asset Allocation Forum that pools must be careful about not launching sub-funds in areas that are currently fashionable but likely to diminish in importance.

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He said that the issue is becoming more important because pools are looking at their offerings in alternatives following the concentration so far on “easy wins” such as equity sub-funds.

Harrison said: “When you are creating a sub-fund, it can take up to a year, and you are doing it in the expectation there will be benefits in terms of cost savings.

“Winding up a fund takes up to six years, incurring costs throughout that period with no benefit at the end.

“It follows that pools need to be very careful about agreeing to launch something.”

Harrison said that some asset classes might be fashionable at the moment, but may not be in five years’ time.

He said: “These types of assets are more suited to multi-asset capabilities, as opposed to having dedicated funds which are more costly and onerous to run.”

Also speaking at the conference, Rachel Elwell, Border to Coast chief executive said that her pool had brought forward its plans for creating alternatives sub-funds.

She said: “We originally planned to do alternatives near the end of the process. However, it became obvious early that we would need to do it for this round of strategic allocations.”

Harrison said that the improving funding levels within LGPS funds mean that pools now have a greater chance to provide diverse options to pension schemes which were previously equities-focused in the chase for high returns.

He said that pools offered an opportunity to give funds access to invest in asset classes that may not have previously been cost-effective for them.

“My view is that pooling is good,” he said. “It will make funds’ lives easier eventually.

“Right now it makes life a bit more complicated.  In order to get advantages of scale they need to decide what to do. At scale you have to work together and agree what you want.”

“If you thought that has been challenging for equities it will be even harder with alternatives.”

Speaking to Room 151 last month, Nick Buckland, senior investment consultant and LGPS adviser at Mercer, said funds are likely to have to increasingly implement changes in investment strategy through the pools.

He said: “That will present some challenges. You can’t ignore the fact that the implementation vehicle is through the pool and it therefore needs to be a big part of the consideration when you’re looking at strategy.”

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