Pension ‘superpools’ needed to cut fees

Calls for UK pension funds to pool their capital when investing in the likes of infrastructure funds could grow louder as a result of a new survey showing an escalation in the amount of fees they are paying to managers.

Research by the Daily Telegraph found that 89 local government pension schemes (LGPS) paid £347 million (€406 million; $523 million) in fees to investment managers last year – up 9 percent on the figure for 2011. At the same time, the value of these pension funds increased by just 4 percent.

Meanwhile, separate research from the Financial Times found UK LGPS’s paying fund managers three times as much as other schemes of a similar size.

Edi Truell, chairman of the London Pension Fund Authority (LPFA), said: “These research papers further support our assertion that creating pension scheme ‘superpools’ of up to £50 billion would result in markedly reduced fees for LGPS funds, improving net returns and helping to reduce deficits.”

As well as fee reductions, the LPFA envisages that pooling capital would result in the ability to invest in a wider range of asset classes and pursue more complex investment strategies – potentially driving higher returns. It is argued that such a move would also lead to much lower administration costs.

Last week, local government minister Brandon Lewis issued a call for evidence on the shape and size of LGPS’s. He questioned whether the schemes, which look after more than £150 billion on behalf of 4 million members, are fit for purpose in their current form.

The LPFA points to estimates suggesting that pooling could deliver additional investment returns of 0.5 percent to 1.0 percent per annum for local authorities in England and Wales, equating to £1.5 billion per year.

The LPFA is a signatory to the Pensions Infrastructure Platform, which has so far raised £1 billion in soft commitments from UK pension funds for investment in infrastructure. The platform – which is currently pondering whether to outsource fund management or keep it in house (or a combination of the two) – is aiming to raise £2 billion.