It is a debate that has been growing momentum across the financial services sector in the past few years and now the government has seemingly nailed its colours to the mast, signalling its intention to ditch active management and multi-manager funds for a £178bn pension scheme.
Following an assessment by pension consultants Hymans Robertson, the Department for Communities and Local Government has backed plans that could save £660m a year in investment costs for the Local Government Pension Scheme.
The department sets the rules that govern the scheme in England and Wales, which is managed through 89 funds relating to county councils as well as each of the 33 London boroughs.
It houses a total of £178bn in assets, receives employer contributions totalling £6bn each year and, according to a consultation published today (2 May), spends as much as £790m on investment costs including trading costs, significantly more than previous estimates of £536m.
The scheme is managed through both a national scheme advisory board and a local board for each of the 89 funds, each of which operate their own investment strategy and manage their own funding level, cash-flow and balance of active, deferred and pensioner members.
Under the new plans, the funds would make greater use of collective investment vehicles, which Hymans Robertson has said will allow them to balance redemption requests against those buying into the fund and thus reduce the need to sell assets and incur transaction costs.
It will also allow the funds to access institutional and alternative assets classes, such as hedge funds, private equity and infrastructure funds, that otherwise would require the use of expensive multi-manager funds.
Hymans Robertson also suggested that the scheme, through these collective funds, invest into passive managed funds instead of higher-cost active alternatives for simple bond and equity investments.
According to the consultation, moving to passive management could save £230m annually, reducing transaction costs would save £190m, ending the use of fund of funds would save £240m a year within ten years.
There were 4.68m members of the Local Government Pension Scheme at the end of March 2013. The consultation runs until 11 July.
