The government’s proposals for reforming the Local Government Pension Scheme’s (LGPS) investment strategy are too narrow and punish well-performing funds, the National Association of Pension Funds (NAPF) has warned.
In its response to the Department for Communities and Local Government’s (DCLG) consultation, Local Government Pension Scheme: Opportunities for collaboration, cost savings and efficiencies, the NAPF said the government had focused purely on reducing costs rather than how the scheme can secure liabilities and reduce deficits.
The trade body, which represents some 1300 UK pension funds with around £900bn under management, said neither passive investment nor investment in one type of collective investment vehicle (CIV) should be made mandatory.
Instead it said the government should focus on identifying good and bad performance within the LGPS at a fund level, with a view to bringing poorly-performing funds up to standard through targeted regulatory interventions.
It also advocated a ‘comply or explain’ approach regularly reviewed by various external parties and giving funds the flexibility to look at alternative ways of co-investing.
NAPF chief executive Joanne Segars (pictured) said: “The NAPF supports the government in its wish to secure a LGPS that delivers good outcomes for its employers, local taxpayers and scheme members. But the government is mistaken in thinking the LGPS can be treated as a homogenous whole when it is comprised of 89 different funds, some of which already perform extremely well.
“A subtler and more intelligent approach than that outlined by the government is required if we are to ensure funds with good performance are not hamstrung to help those that perform poorly.”
Meanwhile, Aon Hewitt’s consultation response said the main benefit from the introduction of CIVs would be the increased investment governance, which in turn will increase the probability of achieving improved net investment returns and help address the LGPS deficit much more quickly than cost savings alone.
It said: “The main benefit from the introduction of CIVs would be the increased investment governance. This would be achieved by only having best of breed managers available and making sure that these managers are removed if they are no longer best of breed. It will also give pensions committees more time to focus on the important strategy and asset allocation decisions rather than the underlying managers.”
Some of London’s councils are already in the process of forming a London CIV which is looking to invest collectively in passive vehicles. However, Islington Council pensions sub-committee chairman Richard Greening has told portfolio institutional it would be better for the London CIV to start by investing in complex asset classes which certain funds lack the governance budget to be able to invest in, rather than passive equities.
He said: “We are interested in infrastructure and property and doing it through a CIV is an excellent way of sharing costs and accessing assets with the right profile – stable, long-term inflation- matching. I am keen they begin to focus on some of these difficult areas where we want the assistance.”
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