LGPS fees caught between complexity and controversy
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As another financial year begins, the debate about the state of the Local Government Pension Scheme is raging more fiercely than ever. During March, a BBC Radio 4 item and a trade press article poured opprobrium on the scheme’s management. And this week, an article in the Financial Times focused on the issue of fees paid to external investment managers.
The article claimed a large number of the 89 funds making up the LGPS “may be squandering millions of pounds of taxpayers’ money on excessive fees to fund managers”. But a number of senior sector professionals have told Room151 that the picture is more complex than the story suggests.
The FT article, as well as the Radio 4 investigation, was based on figures compiled by John Clancy, a Birmingham City councillor. Clancy’s figures showed that while some councils are spending as little as 0.1% of their total asset size on fund management, others are spending up to 1.14%. Clancy told the paper that any spend above 0.4% was “absolutely dreadful”.
The £765m Hammersmith and Fulham pension fund, for example, spent £4.9m on investment costs last year and achieved a 6.4% return. The £775m Enfield pension fund spent just £1.3m on investment costs for an identical return.
But Graham Muir, partner and head of public sector with pensions adviser Barnett Waddingham, insists the figures, taken in isolation, reveal little. Firstly, he says, councils might link performance payments to returns made over a number of years. “All they have done with these figures is look at one particular year, which is nonsense,” he says.
In addition, he points out that performance cannot be inferred by looking at the net return percentage. “Most funds won’t have the same strategy – a figure of 6.4% could be well above a benchmark set for the manager or it could be well below, which would affect the amount of fees paid.”
Pension adviser Hymans Robertson worked with benchmarking company CEM on a report produced last year for the Department of Communities and Government into the future structure of the LGPS. The report examined data for 18 funds with assets of £38bn – selected to represent the average make-up and size of funds across the scheme – and compared it to a global peer group of 21 funds ranging from £25bn and £45bn in assets.
The results appear to contradict the claim that funds are paying excessive fees to external managers. On average, fees for LGPS funds made up 0.575% of asset values, compared to a global benchmark of 0.546%. Linda Selman, partner at Hymans, says: “On the face of it, they were paying just a tiny bit more than their peers.”
And when CEM delved into the reasons for the disparity, they revealed a number of LGPS funds were using a fund-of-funds arrangement, which saw fees paid to a top-level manager on top of individual fees for the underlying funds. Selman says: “This is more expensive but is one of the few ways LGPS schemes – which are relatively small compared to global funds – can diversify.”
In addition, Selman says, different funds have accounted differently for different fees, making comparison difficult. She says: “Some using fund-of-funds arrangements have only included the fee they paid the manager – not the layer of fees underneath – while others have included everything. Smaller funds often pool their assets and have not reported these fees,” she says.
These accounting variations are set to narrow, thanks to new Chartered Institute for Public Finance and Accountancy guidance which Selman says will come into effect this financial year. Until this happens, she says it is difficult to draw too many conclusions from comparing individual funds. And she adds: “The CIPFA guidance has been interpreted in different ways up until now, but the revisions should allow for greater transparency on fees.”
But to Mike Jensen, chief investment officer at Lancashire County Pension Fund the furore only serves to highlight a bigger issue – whether councils should be paying external consultants fees at all. Although he admits it might be more difficult for smaller funds to break away, he says: “The question for me is why aren’t councils creating in-house teams to manage funds? It is more efficient and cheaper.”
