Is the game up for active fund management?


The Department for Communities and Local Government announced yesterday that £85bn of actively managed assets could be transferred to passive management and that the fund of fund structures could be collapsed into a collective investment vehicles.

This is very significant as has been pointed out by this blog’s regular contributor Michael Johnson who in a deliciously disruptive press release suggested

“The Government’s decision to place the underlying research report, independently produced by Hymans Robertson, into the public domain is welcome. This introduces a degree of transparency hitherto unseen in public service pensions, and robustly shows that the additional costs associated with active fund management, relative to passive management, are unjustified. …  There are also of course profound implications for the on-going management of private section occupational pension funds.”

The sums involved are staggering “Employer contributions to the Scheme, the majority of which are funded by taxpayers, were more than £6 billion in 2012-13. The costs of managing and administering the scheme were estimated as being £536 million in 2012-13.

However, the actual costs are likely to be rather higher; the investment costs alone have recently been estimated as in excess of £790 million.

The two key proposals are that:

1.all of the LGPS’s £85 billion of actively managed listed assets should be moved to passive fund management, to be accessed through a common investment vehicle. The resulting reduction in investment fees and  transaction costs is expected to save the LGPS some £420 million per year.

2.all “fund of funds” arrangements should be replaced by a common investment vehicle for alternative assets, ultimately saving the LGPS a further £240 million per year.

These savings will accumulate over the years, potentially saving the LGPS employers (i.e. taxpayers) many £ billions in employment costs. 

I’m not going to go into the rights and wrongs of adopting this approach, Susan Martin who heads the LPFA had called for the Government to go further and pool the liabilities (not just the assets).

Many people I know, Michael included, have called into question the benefit structure of Local Government Pensions which has been likened to the white side of “pensions apartheid”.

But let’s stick to the matter in hand (and under consultation). What does Michael mean by “profound implications for the ongoing management of private section occupational pension funds”?

The Hymans Robertson report on which the proposals are based is quite explicit

There are some funds which have performed consistently well relative to their peers. However, for the LGPS taken in aggregate, equity performance before fees for most geographical regions has been no better than the index.

The benefits of active management are nullified by the transaction costs. The fees paid to the active managers are a pure drag.

Overall the Local Government Pension Scheme (LGPS) is paying around 0.41% for its fund management, slightly less than would be expected in the private sector. But it’s the (over) use of active management and the employment of inefficient fund structures to manager alternatives (hedge funds) that really costs the tax payer.

The report also notes that keeping all the plates spinning is costing £45bn in investment over-site . Good on Hymans for including this (though I suspect that overall they have more to gain than lose from these proposals).

So what the report is saying about public sector funds is probably true of the private sector too.

Transaction costs wipe the alpha generated by active equity managers

Fund of (hedge) funds add an unnecessary layer of intermediation

All this complexity requires further consultancy costs.

Expect a massive backlash from the active fund industry , alternatives managers and the investment consultants. There are a lot of Ferrari salesmen who should be worried too!

Well done to all for getting these numbers out in the open, the consultation paper is a good read, especially the objections to consolidation put up by fund managers keen to “preserve the democratic link between local authorities and their managers”. These links presumably include the “relationship management” on which so many of our prestigious social and sporting events rely,

About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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2 Responses to Is the game up for active fund management?

  1. Con Keating says:

    The real question should be why are these pensions funded at all. A book reserve system would be far cheaper. It is not as if these bodies can go bankrupt.

  2. henry tapper says:

    You are right Con. I’m sure there was a reason many years ago why some Government bodies set up funded pensions and some didn’t- you probably know!

    It doesn’t make sense today. If they can take the Royal Mail Pension Fund liabilities onto our balance sheet- why not this lot!

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