TUC Trustee Conference
LGPS
Governance, Economics & Mergers
1
Public Services Pension Scheme Act 2013
• All UK countries
• LGPS ‘national board’ reporting to Secretary of State
or equivalent
• England/Wales – 6 employer reps and 6 TU
• All local funds must have a board with member
representation – but in England/Wales this has been
postponed until the fund merger review recently
announced
• Cost sharing comes in 2016 – employees to bear the
brunt of any increases in costs
• England/Wales board will have oversight of the 89
funds
2
Latest developments – from the Minister
• “Within the LGPS, between 1990 and 2012, the contributions
paid by scheme employers as a proportion of total scheme
income increased from 37% to 51%. The level of investment
income going towards that cost has remained steady at around
£3 billion, which means that, in percentage terms, it has actually
decreased from 43% of total scheme income in 1999 to just 25%
in 2012. It does not take a degree in rocket science to realise
that costs are escalating at too fast a pace and that too much
of that cost is falling to employers and taxpayers”.
• “I can also report that the reform package agreed by
Government for the LGPS will ensure that the cost of the new
scheme to employers and taxpayers, when it is introduced in
April, will not exceed 13% of pensionable pay. If, at future
scheme valuations, that cap is exceeded, steps will be taken to
recoup the excess cost, back to the agreed 13% cap”.
3
New LGPS structure
Admin Authority
Pension Board?
Board?
Pension
Bank
Account
Pension Committee
Council and
Pension cash
Payroll pays pension
Treasury Management
collects contributions and distributes cash
Unitary
District
Schools
SB
AB
Private
contractors
and others
4
IORP Compliant
Model LGPS Fund
Management Board
Investments
Pay Out
Pay In
Admin Auth
Scheduled
Admitted
5
LGPS England sources of income
6000
5000
Annual income £m
4000
Em plo y e e co ntributio n Engla nd
Em plo y e r co ntributio n Engla nd
3000
I nv e stm e nt inco m e gro ss
Engla nd
2000
1000
0
1994
1996
1998
2000
2002
2004
2006
2008
2010
Y ear
LGPS England: Sources of income by % of total income
6 0 .0
5 0 .0
4 0 .0
% share incom e em ploy ee s
% share of incom e em ploy e rs
3 0 .0
% share of incom e inv estm e nt
2 0 .0
1 0 .0
0 .0
1994
1996
1998
2000
2002
2004
2006
2008
2010
6
LGPS fund performance and cost
Year
Asset values
Investment Income
£m
% return on assets
Management cost £m
Cost % of income
2009
£96,776.94
£2,764.72
2.86
£249.06
9.01
2008
£119,494.61
£3,099.42
2.59
£277.06
8.94
2007
£121,957.44
£2,993.84
2.45
£259.87
8.68
2006
£112,644.56
£2,617.67
2.32
£200.11
7.64
2005
£89,229.95
£2,290.03
2.57
£160.95
7.03
2004
£79,164.82
£2,112.75
2.67
£136.84
6.48
2003
£63,610.91
£2,027.72
3.19
£117.46
5.79
2002
£78,040.57
£2,162.41
2.77
£120.20
5.56
2001
£78,314.96
£2,269.30
2.90
£125.38
5.53
7
8
Merger already taken place?
LGPS Fund managers
top 5 assets under management
top 10 assets under management
top 15 assets under management
top 20 assets under management
All contracts 785
Total LGPS asset value
% of assets under external
management
£m
£64,382
£84,473
£97,212
£105,840
£ 144,126
£161,000
89%
9
Manager
Legal and General Investment
Management
Contracts
Value £m
57
£
25,418.76
UBS Global Asset Management
BlackRock
Baillie Gifford
Schroder Investment Management
State Street Global Advisers Ltd
Newton Investment Management
Capital International
Aberdeen Asset Management
Standard Life Investments
29
50
30
40
16
22
9
20
28
£
£
£
£
£
£
£
£
£
12,353.42
10,142.65
9,473.45
6,994.42
4,806.22
4,696.39
3,784.42
3,628.54
3,175.62
Fidelity Worldwide Investment
J.P. Morgan Asset Management
Alliance Bernstein Institutional
Investments
13
15
14
£
£
£
2,858.67
2,687.30
2,588.40
Lazard Asset Management
Insight Investment
CBRE Global Investors
Wellington Management International
11
7
21
12
£
£
£
£
2,461.67
2,056.44
1,968.70
1,845.21
Henderson Global Investors
M&G Investments
Aviva Investors
Top 20
10
19
13
436
£
1,697.10
£
1,641.77
£
1,569.86
£ 105,849.00
10
Mass is important
• The international evidence shows that larger funds generate
greater levels of return (per £m assets) than smaller funds and
this is also the case for the LGPS.
Taking the 5 largest and 5 smallest funds for 2012
• The assets of the five largest funds are 82.93 times greater than
the assets of the 5 smallest funds. The return generated by the
five largest funds is 139 times greater than the return generated
by the 5 smallest funds
Taking the 10 largest and 10 smallest funds for 2012
• The assets of the ten largest funds are 38.35 times greater than
the assets of the 10 smallest funds. The return generated by the
ten largest funds is 45 times greater than the return generated by
the 10 smallest funds
11
UNISON Commissioned - Analysis
• Mergers in 2001 could have had substantial effects on total asset
value in 2009:
– £9.6 billion extra asset return using the
outperformance of the four largest funds
– £793 million extra asset value lowering the
investment expenses using the regression output
– Asset values increase to £161bn 33% more in 2010
• Table shows the gains per region in 2009 in £millions
Group
London 1
London 2
Midlands 1
Midlands 2
South
East 1
South East
2
Reduction of investment expenses
66.3
64.1
63.7
72.7
63.2
65.5
Outperformance of 4 largest funds
1,000.5
1,333.4
1,130.9
250.6
1,631.5
1,361.0
Group
North 1
North 2
North 3
South West
Wales
Scotland
Reduction of investment expenses
85.3
90.6
56.8
65.1
41.4
58.4
Outperformance of 4 largest funds
446.7
99.8
583.0
840.1
158.9
772.0 12
Stone Fish Consulting
• Estimate possible savings to Pension Funds by
one of three means:
• METHOD 1: Compare current fund costs to the
mean values for each cost category
• METHOD 2: Compare current fund costs to scale
value for each fund, this is true bench marking
• METHOD 3: Combine the funds and compare
current costs to costs at scale offered by the
single large fund
13
14
Next steps
“When the call for evidence has closed, on 27
September, we will work in conjunction with the
Local Government Association to analyse the
responses. We intend then to issue a consultation
paper on the options for change very early in the
new year. I hope that hon. Members will agree with
me that the call for evidence on structural reform of
the LGPS in England and Wales represents a key
stage in the process of improving the efficiency and
cost-effectiveness of the scheme and ensuring that it
remains sustainable, affordable and fair to those who
pay its costs”.
15
Effective Governance for Pension Fund
1. They were aligned interests with scheme members
(LGPS is not aligned with scheme members – tax payers considered more important)
2. They had strong governance
(LGPS funds are embedded in the employer’s structures and run like any other council
committee)
3. Sensible investment beliefs (LGPS investment regulations are
roundly dismissed as out of date and without fiduciary scheme member interest)
4. Right-scaled, from $30bn+ of assets under
management (Largest LGPS fund is £12bn – most are below £5bn)
5. Competitive compensation for fund staff (Almost all
investment management is carried out by external contracts)
International Centre for Pension Management http://www.rijpm.com/
16
Workshop Tasks
•
•
•
•
Each table will have LGPS annual reports
Pick someone to report back
Calculate returns by fund and in total
Compare fund managers – do you have the same
ones? How many? How much are they managing
in total?
• Add up investment charges – are there any
differences in the same managers?
• Custody banks and their costs?
• Consultants/Advisors and their costs?
17