LGPS pooling costs will take a decade to ‘break even’

The cost of reorganising the Local Government Pension Scheme into a small number of pools may not break even for up to 10 years, according to sector experts.

In 2014, local government minister Brandon Lewis triggered reform of the system claiming that town halls could save £660m a year by reducing fees, transaction costs and using a smaller number of investment vehicles.

However, this week, a heavyweight report prepared by a number of funds said that those savings are only likely to reach between £190m and £300m in year 10 of the scheme. Crucially, though, these savings do not take account of the “significant” costs and risks involved in moving to the new system.

The Project Pool report said: “The costs of implementing change – establishing new structures and transitioning assets – will exceed savings in the short-term.

“Until transition costs are estimated more accurately, it is difficult to estimate how many years it will take to break even,” the report said, although it predicted that this would not be until the “very long term.”

William Bourne, director, City Noble, said: “I find it impossible to believe that there will be net savings from the LGPS reforms within five years, and would be very surprised if they were achieved within 10.

“What is being proposed is huge and the transition costs are likely to be enormous, although frankly nobody can come up with an estimate that is likely to be accurate at this stage.”

The Project Pool report was prepared by 24 LGPS funds assisted by investment adviser Hymans Robertson.

It said that for some asset types, including private equity, hedge funds and infrastructure, existing investments will need to run for a number or years to avoid early termination fees.

It said: “This means that the potential annual savings from pooling and new investment platforms will not be fully achieved until year 10 or later,” the report said.

Once the costs of transition and establishing and running the pools is taken into consideration, it said, the reforms are unlikely to break even until the “very long term”.

In addition, funds currently using a significant element of in-house management are likely to suffer higher costs, at least initially, the report added.

Elsewhere, the report found that the government’s preferred governance structure for the new regional pools – the Authorised Contractual Scheme – would not be adequate to accommodate the full range of asset types LGPS currently invest in.

It said: “It is likely that each LGPS multi-asset pool would need more than one pooling vehicle to accommodate its full range of assets, increasing the costs…”

It called on government assistance to allow the housing of assets in a single pooling vehicle.