In 2013 Michael Johnson of The Centre for Policy Studies  published a paper “the local Government Pension Scheme; opportunity knocks” http://tinyurl.com/jru498m.

Today he publishes the sequel, “the LGPS- the lost decade”. http://tinyurl.com/jtz2jwx

In the intervening period, Johnson has seen none of the ten actionable proposals properly implemented. Instead he has documented the carnal behaviour of the pensions industry , feeding off the LGPS’ corpse. This is all good stuff for journalists but it doesn’t help get things sorted.

Johnson’s proposals have increased from the ten in 2014 to the 2015 today, but they arefundamentally the same, the LGPS should be turned into a sovereign wealth fund, all traces of localism should be expunged and the army of parasitical intermediaries replaced by a single governing body.

Rubbish in – rubbish out

But when you start looking at the tables of statistics that form the basis of the report, what springs out is the inconsistency of reporting.

Taking the combined reporting costs for investments and governance, Johnson demonstrates that the reports of each of the 89 individual LGPS funds,  exhibit an extraordinary range of total annual costs per member.  Enfield’s £592 (2015-16) is a staggering 21 times larger than West Yorkshire’s £28.

Johnson concludes that generally, the larger the fund, or the more in-house the asset management, the lower the cost per member.  He is of course right but with numbers that don’t make sense

One of my friends makes  comment.

 £28 for west yorkshire would make it the most efficient scheme in the country – the best that I have seen is British Steel at £62 – and they have won prizes as the best. The average for medium schemes (100-1000) in the 2014 TPR study was £505.

I think most of us would expect LGPS schemes to operate at a lower efficiency level than a private comparator. The LGPS operates a closed shop on advisers who have admitted a huge range of fund managers into the circus ring.

That the  cost of these consultants and fund managers is higher than it should be is well know. This is being dealt with partly by the new pooling arrangements being interested by big Government and partly by the pressure being put on fund management fees by Unison, through the new reporting requirements which are widely reported in recent blogs.

The system is inefficient and costs are higher. Attempts to break the hegemony of advisers have failed , mostly as a result of the absurd procurement rules of the LGPS which requires a new consultant to demonstrate its track record as an existing consultant. This absurd state of affairs means that there can be no new consultant unless it buys enough of an existing consultant to advertise its track record (for marketing purposes).

But none of this analysis appears in the report. The report shows only the superficial understanding of the deep malaise within the LGPS, ,it talks to reported statistics ,it simply isn’t listening

And are we expected to take note and act on the evidence that Johnson has collected?Johnson himself accepts that many of these numbers are mis-reported, my friend rightly points out that they are incredible, the only purpose of including these numbers seems to be  to grab attention.

Cheap shots at asset managers

If I am being critical of these headline numbers, I am even less  impressed by other parts of the report.

There is a point to be made here but it cannot be made this way. The nominal return of 5.3% on the 89 LGPS funds cannot be compared against 6 arbitrarily displayed returns from indices without considerably more analysis than the reports gives. Again we are seeing headline grabbing at the expense of proper research.

That proper research is being done, by independents such as Sier and Meech, it’s research that doesn’t call for revolution but for each fund manager to re-tender based on a value for money pitch. It may get to the same place as Johnson, but it will do so in an orderly way.

Johnson’s inadequate analysis is an open goal for the investment Association who will do their best to rubbish those doing the detailed work as “all in the same boat”.

Johnson’s big picture is right but…

Johnson is good in disclosing these relative numbers. If we are to believe that there is at least internal consistency in the data he has, then his conclusion that “reported” costs per member within LGPS have doubled over the period seem reasonable.

What Johnson is uncovering is the improvements in cost reporting that see funds such as Middlesbrough, Flintshire and Westminster waking up to smell the total cost of intermediation, rather than what their fund managers would like them to believe.

The conclusion we can draw is not that the LGPS has become more expensive, but that when it fully discloses its numbers, it will be seen to be  more expensive still.

Again, the hard miles that are being put in by Meech and Sier (neither of whose work is acknowledged in this paper, will show that the hidden costs of the LGPS’ fund management mandates are still generally undisclosed.

What can we say about this work?

I very much hope that Big Government is not taking this research seriously. It is headline grabbing but it is not saying anything that we do not know already – and know better. Those who  are trying to fix this problem, are doing so constructively and meticulously. Johnson is charging around in his usual bull in a china shop way, hoping for revolution.

But as with other recent papers calling for an end to the state pension , the replacement  of private pensions with the “ISA family”  and the inversion of pension taxation, Johnson is superficially attractive but not helpful.

We are where we are; people are trying to get by, we are trying to restore confidence inch by inch; each of these loud shouty reports repeats Johnson’s central message, which is that only revolution will work. He is wrong, change has to be incremental, no matter how frustrating that might be to him and his think-tank. It has to be that way because we are dealing here with a venerable and complex mechanism which is a lot easier to break than to mend.